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    US pension market quarterly

    US pension market quarterly

    A statistical and qualitative review of Q1 2022 and investment outlook

     

    Download the full report.

    2022 began with hopes that the pandemic was finally drawing to a close, as governments around the world started to drop restrictions on the belief that the virus had become endemic. With the stop-start cycle of lockdowns and vaccinations appearing to be over, the combination of super easy monetary policy and multi-decade highs for inflation became harder for central banks to justify. Rhetoric hardened, and markets pulled forward their expectation for when the tightening cycle would start. In the US, forecasts solidified around a first hike in March, and increasingly exuberant market participants then moved to price in a 50-basis point hike.

    Unfortunately, as John Lennon famously wrote in the lyrics to the song "Beautiful Boy" – Life is what happens when you’re busy making other plans…. In late February Russia launched a full-scale military invasion of Ukraine and the world entered a period of deep uncertainty. Amidst the turmoil, investment grade credit spreads widened significantly, returning to long-term average levels. Treasury yields initially rallied, buoyed by concerns about the impact on growth, before reversing sharply as the Federal Open Markets Committee shifted to a more hawkish tone at their March meeting. It appears that uncertainty is here to stay.

     

    Summary

    Recent events are a reminder that uncertainty is here to stay

    • Fed outlook for 2022: The tightening cycle started with a 25 basis point hike in March but came with a hawkish shift in rhetoric; the median committee member now expecting a total of seven hikes in 2022, one of the fastest tightening cycles in recent history

    • Solutions: Many pension plans have experienced a significant improvement in funded status over recent years. With the outlook less certain, a downside protection strategy is one way to prevent your plan’s funded status from deteriorating
    • Pension news: A Request for Information from the DOL seeks public comment on what actions it should take to protect pensions from changes in climate, while the conflict in Ukraine has result in Russia being removed from a broad range of indices, putting pressure on pension plans to divest any holdings they have

    • Credit: We outline why we believe BBB has become the new normal in investment grade credit, representing the sweet spot from a cost of capital perspective. We believe an allocation to below-investment grade credit can potentially allow a strategy to capture credits being upgraded to BBB
    • Investment outlook: A sharp upward move in both yields and spreads has made us more constructive on investment grade credit from a total return perspective, but we are concerned that yields could continue to move higher. In higher risk segments of credit markets, we have moved to a more defensive stance, but in structured credit and muni’s we believe higher yields could present an opportunity.
    • Key risks: A more aggressive Fed could raise the risks of recession, and events in Europe could spiral, creating a market shock

    • Educational section: With US inflation at the highest levels since the 1980s, investors are worried about how long inflation will remain elevated. We attempt to answer this question – not by looking at supply chains, energy prices or goods and services – but by focusing on what has historically been the most persistent and long-term river of CPI: rental inflation.

    Fed outlook 2022 — a hawkish shift

    The US FOMC raised interest rates by 25 basis points at their March meeting, as generally expected. In their accompanying statement, they noted that the implications to the US economy from the invasion of Ukraine were “highly uncertain”, but that “in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity”.

    The hawkish rhetoric continued post the meeting. Fed Governor Christopher Waller stated that “half-point rate hikes could be needed as inflation is raging”, and James Bullard, President of the St. Louis Fed, called for the central bank to raise rates to above 3% “this year”.

    Notably, the rhetoric of Fed members has now diverged considerably from other major central banks. A number of forecasters have moved to anticipate both a 50 basis point hike at the May meeting, and the announced start of the balance sheet reduction plan. Meanwhile in Europe, the Bank of England raised interest rates by 25 basis points to 0.75% as expected at their March meeting but noted that only a “modest” tightening of monetary policy may be appropriate in the coming months. In the eurozone, European Central Bank President Christine Lagarde noted that the ECB would only raise rates “some time” after its bond-purchase program finished, which still expected to be some months away.

     

     

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    Life is what happens when you're busy making other plans.

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    Life is what happens when you're busy making other plans.

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    John Lennon, Beautiful Boy
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