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Investment Insights

Pension Curve Insider: LDI Solutions October Monthly Recap

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

Monthly Recap

Marked-to-market discount rates ticked up in September as the Treasury curve twisted. The short end fell off as much as 20 basis points while the middle and long end rose by nearly the same margin. Discount rates based on the AA-rated spot and top-yielding curves moved up in response. Meanwhile, IG spreads came in slightly while discount rates based on the IRS curve were relatively flat for the month.

Liability values subsided modestly in a rare bout of relief for plan sponsors. Discount rates now sit 107 basis points lower than a year ago using the AA-rated credit universe. Top yielding AA-rated bonds are 94 basis points lower than September 2018 and provide 33 basis points of additional yield relative to the broader market.

Turnover activity maintained pace in September as over 3% of the AA-rated index changed eligibility during the month. Last month’s activity was dominated by entries into the AA-rated index as 18 new issues worth $18B became eligible. Apple’s 6 new issues worth $6B made up the largest percentage of entering market value. Notably, over half of the month’s new issues mature beyond the 10-year mark, adding to the availability of hedging assets for longer duration cash flows.

Liability Impact

Yield Curve

Liability Value 9/30/19

Discount Rate

Liability Value 8/31/19

Discount Rate 8/31/19

Liability Value 12/31/18

Discount Rate 12/31/18

Yield Curve







Top Yielding
Accounting Curve


3.51% $10,946 3.36% $9,446 4.43%

IRS Yield Curve


3.32% $11,016 3.30% $9,400 4.44%

Sources: Bloomberg Barclays. Bloomberg Index Services Ltd. Copyright 2019, Bloomberg Index Services Ltd. Used with permission. IRS, and T. Rowe Price. Sample plan cash flows have a liability of $10,000 at 4.0% discount rate.

Accounting Curve

Sources: Bloomberg Barclays. Bloomberg Index Services Ltd. Copyright 2019, Bloomberg Index Services Ltd. Used with permission. T. Rowe Price.



Curve Impact


New Issues

(6 bonds)

Apple made up a hefty chunk of the month’s entering market value, accounting for $6B of the month’s $18B of new entrants into the AA-rated index. Maturities of the issues range between 1 and 30 years with much of that impacting the middle and long end of the curve.

Multiple Issuers

New Issues

(4 bonds)

With over half of the month’s entering market value coming in the form of 10+ year maturity issues, yields at the long end of the curve were pushed down. Specifically, 4 issuers contributed to the $4B in entering market value at the 30-year mark, reducing yields around 20 basis points at that tenor.

Sources: Bloomberg Barclays. Bloomberg Index Services Ltd. Copyright 2019, Bloomberg Index Services Ltd. Used with permission. T. Rowe Price.


New Issues

Other Bonds Entering


Other Bonds Exiting

September 2019






Market Value ($M)





Market Value (%)





2019 YTD






Market Value ($M)





Market Value (%)





Sources: Bloomberg Barclays. Bloomberg Index Services Ltd. Copyright 2019, Bloomberg Index Services Ltd. Used with permission. T. Rowe Price.

Top Yielding Accounting Curve

Sources: Bloomberg Barclays. Bloomberg Index Services Ltd. Copyright 2019, Bloomberg Index Services Ltd. Used with permission. T. Rowe Price.

IRS Curve

Sources: IRS and T. Rowe Price


AAA Corporate OAS (basis points)

AA Corporate OAS

A Corporate

August Monthly Average




September 2, 2019




September 16, 2019




September 30, 2019




September Monthly Average




Sources: Bloomberg Barclays. Bloomberg Index Services Ltd. Copyright 2019, Bloomberg Index Services Ltd. Used with permission. T. Rowe Price.

One-Year Rolling Returns and Tracking Error


September 2019 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 September 30, 2019.

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 2019, 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 September 2019 and are subject to change without notice. All figures presented in USD.

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. © 2019 T. Rowe Price. All rights reserved.


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