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Fixed Income

Pension Curve Insider

LDI Solutions December Monthly Recap

Aaron Stonacek, ASA, CFA, Solutions Analyst
Justin Harvey, Solutions Strategist for Multi-Asset Solutions

Monthly Recap

Discount rates moved down slightly in November. The AA-rated spot curve stayed nearly flat while the top-yielding curve fell 6 basis points. Over the month, spreads widened and Treasury yields rose across most tenors, with the short end of the curve rising most significantly, continuing the significant flattening action we’ve seen over recent months.

Spreads across all credit qualities widened during the month, with single-A credits leading the way, averaging an increase of 3 basis points over the month. Plan sponsors with calendar year fiscal-years are looking at actuarial losses for 2017 as rates remain about 40 basis points lower than 2016 year-end, using the broad AA discount rate curve. The top yielding AA-rated bonds sit about 50 basis points lower than 2016 year-end, providing 25 basis points of additional yield relative to the broader market.

November saw a significant uptick in turnover from prior months as new issues from Apple and a mid-month downgrade of GE each contributed to a volatile month in the AA-rated index. Apple’s November issues totaled $7B of market value, accounting for over half of the index’s new entries during the month. Meanwhile, Moody’s downgrade of GE on November 16th meant the AA-rated index lost about $60B in market capitalization, over 9% of the index’s value.

Liability Impact

Yield Curve

Liability Value 11/30/17

Discount Rate 11/30/17

Liability Value 10/31/17

Discount Rate 10/31/17

Liability Value 12/31/16

Discount Rate 12/31/16

Yield Curve







Top Yielding
Accounting Curve







IRS Yield Curve







Sources: Barclays POINT, IRS, and T. Rowe Price. Sample plan cash flows have a liability of $10,000 at 4.0% discount rate.

Accounting Curve

Sources: Barclays POINT and T. Rowe Price



Curve Impact


New Issue

(6 bonds)

Apple issued six new bonds in November that made up over half of the month’s new entries into the AA-rated bond index. The $7B in bonds was spread across maturities between 2 and 30 years, with the largest offerings occurring around the 10 and 30-year marks. The primary impact on the curve was seen at the 30-year tenor, which fell 15 basis points.



(26 bonds)

Moody’s mid-month downgrade of GE contributed to a significant move in the AA-rated discount curve during November. Weak earnings and cashflows across various business segments meant a massive loss of nearly $60B in market cap from the index. Key maturities for the exiting bonds were at the 3, 15, and 18-year tenors. The 15-year mark moved over 100 basis points while the 18-year point fell 50 bps. Overall, the exiting GE bonds contributed to more than a 9% loss in market cap for the AA-rated index.

Sources: Barclays POINT and T. Rowe Price


New Issues

Other Bonds Entering


Other Bonds Exiting

November 2017






Market Value ($M)





Market Value (%)





2017 YTD






Market Value ($M)





Market Value (%)





Sources: Barclays POINT and T. Rowe Price

Top Yielding Accounting Curve

Sources: Barclays POINT and T. Rowe Price

IRS Curve

Sources: IRS and T. Rowe Price


AAA Corporate OAS

AA Corporate OAS

A Corporate

October Monthly Average




November 1, 2017




November 15, 2017




November 30, 2017




November Monthly Average




Sources: Barclays POINT and T. Rowe Price

One-year Rolling Returns and Tracking Error


November 2017 Return

YTD Total

Annual Tracking Error Relative to Liability

Average Monthly
Return Difference from Liability

Hypothetical Sample Plan Liability





BBgBarc Aggregate





BBgBarc Long Credit





BBgBarc Long Gov/Credit





Hypothetical T. Rowe Price Custom Benchmark





Sources: Bloomberg Index Services Ltd., T. Rowe Price; Analysis by T. Rowe Price. Performance shown in graph and tables above shown from February 1, 2005 through November 30, 2017.

Past performance cannot guarantee future results. Custom Benchmark returns do not reflect the deduction of management fees. Please refer to the disclosure at the end of the article for important additional information.

Copyright 2017, Bloomberg Index Services Ltd. Used with permission.


IRS Yield Curve: Plan sponsors of qualified defined benefit pension plans use this yield curve to determine funding requirements per IRS regulations. These funding requirements are disclosed on form 5500 annually. Yields on AAA, AA, and A corporate securities determine the yield curve for discounting purposes. The yield curve is not a marked-to-market curve representing any single date, but rather an average yield over the course of the entire month. For more information on the IRS methodology, please see treasury.gov/resource-center and irs.gov/Retirement-Plans.

Accounting Yield Curve: US GAAP requires pension plan sponsors to disclose pension obligations using “fixed-income debt securities that receive one of the two highest ratings given by a recognized ratings agency”. As a proxy for bonds useable for accounting purposes, we use the constituents of BBgBarc AA credit universe to develop the accounting yield curve shown. Please see fasb.org for more information.

Top Yielding Curve: Since the US GAAP rules allow the use of a fairly broad range of securities for accounting purposes, some plan sponsors use an optimized yield curve approach to value their pension liabilities on the disclosure dates. Bonds trading at higher yields than other bonds of similar maturity tend to be used for this purpose. To quantify the effectiveness of this approach, T. Rowe Price developed a yield curve using the highest yielding bonds designed to meet SEC requirements at each node.

Annual Tracking Error Relative to Liability: Calculated as the standard deviation of return differences between a fixed income index and a set of cash flows discounted using the accounting yield curve. The liability return has two components: an interest cost component analogous to roll return on a bond, and yield change component analogous to price return on a bond. The table shows annualized ex-post tracking error.

Average Monthly Return Difference: Similar to the tracking error metric, this metric demonstrates how closely a fixed income benchmark tracks a set of liability returns. We calculate this measure by simply averaging the difference in returns over the period shown.

Sample Plan Liability: Pension plan sponsors must account for the cost of their retirement plan on their financial statements.  The amount of this liability can fluctuate over time based on several factors, including benefits earned, benefits paid out, mortality experience, and most significantly, interest rates.  The Sample Plan is intended to be a representative defined benefit pension plan and does not reflect the cash flows from any specific plan.

T. Rowe Price Custom Benchmark: An index of fixed income securities created using T. Rowe Price proprietary methodology that attempts to replicate interest rate exposures embedded in a pension plan’s liability structure.

To learn more, please visit troweprice.com

Important Information

This material is directed at institutional investors or advisors/consultants to institutional investors only and is not intended for distribution to retail investors. It has been prepared by T. Rowe Price Associates, Inc. for informational purposes and is not intended to be investment advice or a recommendation to take any particular investment action. This material should not be redistributed, in whole or in part, without prior consent from T. Rowe Price. The views and information contained herein are as of 30 November 2017 and are subject to change without notice.

The illustrations presented are hypothetical and used to demonstrate capabilities. Certain assumptions have been made for modeling purposes and with the benefit of hindsight and are unlikely to be realized. The specific issuers and bond issues mentioned in this document had significant impact on liability curves calculated using BBgBarc index universes. The modeling used for plan and benchmark development has certain inherent limitations. Benchmark construction may not reflect all material economic and market factors that could have impacted implementation or weighting decisions if the modeled plan actually existed during the time period presented. Actual T. Rowe Price Custom Benchmark characteristics, including (among other things) yield, annualized return, liability-relative tracking error and average monthly returns difference relative to plan liability may differ substantially from the hypothetical scenario presented.

T.ROWE PRICE, INVEST WITH CONFIDENCE and the bighorn sheep design are collectively and/or apart, trademarks of T. Rowe Price Group, Inc. © 2017 T. Rowe Price. All rights reserved.


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T. Rowe Price ("TRP") claims compliance with the Global Investment Performance Standards (GIPS®). TRP has been independently verified for the twenty one- year period ended June 30, 2017 by KPMG LLP. The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.

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