What were the key issues for pension funds in Q1 2024?
US pensionWatch
RATE CUTS ARE COMING, BUT THERE'S NO RUSH
Toto, I’ve a feeling we’re not in Kansas anymore.”
DOROTHY, THE WIZARD OF OZ
We believe investors need to be prepared for an extended period of higher rates as inflation makes its slow journey back to the Fed’s target. We see recession risks as still finely balanced, and believe credit investors need to be diligent, cautious and ready for volatility. In our last quarterly we discussed the topic of the Fed “tightening until something breaks”, and it increasingly appears that, from an international perspective at least, the US dollar may prove to be the catalyst for the “break”. Fed policy has helped drive the US dollar to levels unseen since the Volcker era, a significant problem for other global central banks.
After a four-decade trend of falling rates on a secular basis, the Fed Funds rate is back above the peak that occurred in the previous hiking cycle (in December 2018). This the first time this has happened since 2000 (where rates rose slightly more than they did in the mid-90s). However, it is clear the Fed is not done. Markets are priced for rates to continue rising to a peak of around 4.75% in mid-2023, before declining. Although markets are searching for a dovish pivot, in our view the pivot, when it comes, will simply be to a less hawkish tone, and that rates will plateau through 2023 rather than being cut.
Read the full review and outlook
READ REPORT
The Fed continued to stand firm in its forecast for three rate cuts by year end, despite
significantly increasing its 2024 growth forecast. Although the March inflation data is likely to push back the timing of the first cut, we believe it is a temporary setback and that inflation will ultimately provide the flexibility for the Fed to ease after the summer.
01. key macro view:
FUNDED STATUS JUST KEEPS IMPROVING
02. pension news:
We provide some further details on IBM’s announced launch of a new defined benefit pension plan for all US employees, replacing company 401(k) contributions. The funded status of the largest US plans improved over 2023, driven by gains in asset prices, and the US continued to dominate global pension assets.
Accelerating growth and easing policy
should be good for credit
03. credit:
If, as we expect, economic growth starts to accelerate and the Fed starts to cut, this should be a supportive environment for risk assets and high yield credit is an asset class that should benefit. In a scenario where defaults are close to their historical average level, high yield should provide income well in excess of BBB corporates.
Waiting for wider spreads may mean missing out
04. INVESTMENT outlook:
Some investors are waiting for spreads to widen before they move more assets into credit markets, but we believe this is the wrong focus. The absolute level of yields is still at pre-financial crisis levels, and waiting could mean missing an opportunity to lock in these yields for the longer-term.
Adjusting to the end of the low rate era
05. key risks:
Although there is scope for central banks to ease policy in the short term, we believe central banks will be operating in higher ranges going forward, with the era of low rates at an end. It is unclear if this has been fully priced into asset prices more broadly. The war in Europe continues to be a concern, and there is a risk that events escalate with unexpected consequences. Broader geopolitical tensions are elevated, and tensions between the US and China risk an increasingly polarized world.
the unexpected resilience of global housing markets
06. education:
The global hiking cycle has had less of an impact on global housing markets than many would have expected. To the extent strength in the global housing market continues, it bodes well for consumer strength and the economy’s resilience against the global rate hiking cycle. However, there is a risk that it causes central banks to delay or slow down their rate-cutting plans over the next few years, particularly in markets where housing strength has been particularly pronounced like the US.
DEEP DIVE NOW
READ THE OUTLOOK
SEE OUR KEY insights
READ THE UPDATE
REad more
READ full report
And I promise you, the dawn is coming.
DISCOVER KEY RISKS
%
%