February 2022: U.S. Monthly Pension Monitor

Despite a turbulent equity market, average funded status remained unchanged due to higher discount rates

February market summary

  • Despite more pain in equity markets, funded status stayed flat in February
    Higher discount rates offset a selloff in equity markets resulting in minimal funded status movement. Assets returned -2.6% while liabilities fell by 2.8%.1
  • U.S. equity markets fell for the second straight month
    The S&P 500 Index returned -3.1% and is now down 8.2% since the start of the year.
  • The yield on the Bloomberg Barclays Long Credit Index increased 26 basis points (bps)
    Long credit spreads widened 18 bps while the underlying Treasury basis increased 8 bps. 
Market Watch Dec 2020 Dec 2021 Jan 2022 Feb 2022
Funded status 90.3% 99.8% 101.4% 101.5%
CITI discount rate2 2.23% 2.63% 2.97% 3.20%
Long Credit yield2 2.78% 3.10% 3.51% 3.76%
U.S. 30Y TSY yield 1.64% 1.90% 2.11% 2.16%
S&P 500 3,756 4,766 4,516 4,374

Spotlight: continued uncertainty

  • The uncertainty surrounding markets in January only worsened, driving down risk assets. Nowhere was this exemplified more in tech, where the NASDAQ fell by 3.4% in February after a drop of 9.0% in January3
    • We have also started to see a small sell-off in credit markets, with investment grade and high yield option-adjusted spread expanding by 16 and 17 bps respectively3
    • Additionally, spread widening within Investment Grade markets has been fairly uniform across the quality spectrum, as A and BBB rated spreads increased by 15 and 18 bps, respectively3
    • Within Treasury markets, the spread between 30 and 20 year debt remains inverted, with 20 year Treasuries outyielding the 30 year by 8 bps at the end of February3
  • Russia’s invasion of Ukraine
    • While Russia’s GDP is only 11th in the world, which is slightly smaller than South Korea, it is a crucial supplier of commodities across energy, metals and grains
    • Russia is a key supplier of oil & gas to Europe, accounting for 55% of Germany’s gas imports. Sanctions against Russia has roiled energy markets, sending oil above $100 for the first time since 2014
    • Russia and Ukraine are the 1st and 6th exporters of wheat, respectively. As a result, agriculture commodities have risen by 14.8% since the start of the year. Russia is also a key supplier in palladium, a key component for catalytic converters. This will continue to add upward pressure on vehicle prices, which rose by 12% in 2021
  • The uncertainty of war drove investors into safe-haven assets, with US 10-year yields falling by 17 bps since the start of the war
  • The prospect of higher supply driven inflation along with a slowing economy has put the Fed in a tight spot, as investors are spooked by the potential downturn from an aggressive move to tame inflation
  • In times of uncertainty, credit selection becomes even more important, as investors who simply reach down in quality for yield face losses while investors who are prepared see opportunity

Milliman Pension Funding Index (February Estimate)

1 Funded Status for the current month is estimated and subject to change as final numbers are released. Data from reference Bloomberg Indices.

2 The Long Credit yield corresponds to the Bloomberg Long Credit Index. The Citi Discount Rate corresponds to the FTSE short pension liability index. 

3 Reference sector data is from Bloomberg indices.

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