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Pension Curve Insider: LDI Solutions April Monthly Recap

Monthly Recap

April saw a respite in Treasury curve steepening as investors weigh inflationary expectations on the back end of the COVID crisis. Marked-to-market discount rates dipped modestly as the middle and long end of the Treasury curve paused the march toward higher yields. Discount rates based on the AA-rated spot curve shed 10 basis points while the top-yielding discount curve dropped a similar degree. Investment grade spreads remain compressed, holding levels that preceded the pandemic.

On a marked-to-market basis, plan liability values reversed course as discount rates decline from March month end. Rates based on the AA-rated index stand 5 basis points higher than April, 2020, while top yielding AA-rated bonds are 29 bps lower than a year ago. The top-yielding curve currently provides 36 bps of additional yield relative to the broader market.

April brought a modest amount of turnover within the AA-rated bond index, as nearly 2% of market value changed hands during the month. New entries dominated the month’s activity 2-to-1 as exiting market value was light. Ontario was the month’s largest issuer, bringing to market a $3B bond maturing in 2026. The largest curve impact came from Novant Health, issuing a handful of bonds at 30+ years and totaling north of $1B in market value.

Liability Impact

Liability Impact
Yield Curve Liability Value
Discount Rate
Liability Value
Discount Rate
Liability Value
Discount Rate
Yield Curve
$11,468 3.04% $11,303 3.14% $12,288 2.57%
Top Yielding
Accounting Curve
$10,881 3.40% $10,745 3.49% $11,456 3.04%
IRS Yield Curve $11,229 3.17% $11,105 3.24% $12,182 2.62%

Sources: Bloomberg Barclays. Bloomberg Index Services Ltd. Copyright 2021, 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

Accounting Curve

Sources: Bloomberg Barclays. Bloomberg Index Services Ltd. Copyright 2021, Bloomberg Index Services Ltd. Used with permission. T. Rowe Price.

Issuer Event Curve Impact
Ontario New Issue
(1 bond)
The province of Ontario was April’s largest new issuer. Its $3B offering matures just 5 years out, but made up a healthy chunk of the month’s entering market value. Due to the large amount of issuance around the 5-year point, the discount curve impact was negligible.
Novant Health New Issues
(3 bonds)
Novant Health had the largest discount curve impact during April as it brought to market three new bonds totaling $1.5B in market value. Maturities of the three are spread between 15 and 40 years out. Due to the limited issuance beyond 30 years, its $400M bond maturing in 2061 moved the curve 8 bps.

Sources: Bloomberg Barclays. Bloomberg Index Services Ltd. Copyright 2021, Bloomberg Index Services Ltd. Used with permission. T. Rowe Price.

  New Issues Other Bonds Entering Downgrades Other Bonds Exiting
April 2021        
   Count 10 0 0 3
   Market Value ($M) $8,687 $0 $0 $3,957
   Market Value (%) 1.33% 0.00% 0% 0.60%
2021 YTD        
   Count 50 0 25 6
   Market Value ($M) $48,680 $0 $25,666 $8,063
   Market Value (%) 7.21% 0.00% 3.84% 1.21%

Sources: Bloomberg Barclays. Bloomberg Index Services Ltd. Copyright 2021, Bloomberg Index Services Ltd. Used with permission. T. Rowe Price.

Top Yielding Accounting Curve

Top Yielding Accounting Curve

Sources: Bloomberg Barclays. Bloomberg Index Services Ltd. Copyright 2021, Bloomberg Index Services Ltd. Used with permission. T. Rowe Price.

IRS Curve

IRS Curve

Sources: IRS and T. Rowe Price

Dates AAA Corporate OAS
(basis points)
AA Corporate OAS A Corporate OAS BBB Corporate OAS
March Monthly Average 58 49 73 116
April 1, 2020 59 49 69 110
April 15, 2020 56 47 68 108
April 30, 2020 64 48 67 108
April Monthly Average 58 46 68 109

Sources: Bloomberg Barclays. Bloomberg Index Services Ltd. Copyright 2021, Bloomberg Index Services Ltd. Used with permission. T. Rowe Price.

One-Year Rolling Returns and Tracking Error

One-Year Rolling Returns and Tracking Error
  April 2021 Return YTD Total Return Annual Tracking Error Relative to Liability Average Monthly Return Difference from Liability
Hypothetical Sample Plan Liability 1.66% -5.95% NA NA
BBgBarc Aggregate Index 0.79% -2.61% 6.68% 1.45%
BBgBarc Long Credit Index 1.73% -6.81% 4.44% 0.92%
BBgBarc Long Gov/Credit Index 1.96% -8.64% 3.22% 0.65%
Hypothetical T. Rowe Price
Custom Benchmark
2.09% -5.40% 2.05% 0.33%

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 April 30, 2021.

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 2021, 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 and

Accounting Yield Curve: US GAAP requires pension plan sponsors to disclose pension obligations using “fixedincome 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 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

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 April 2020 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.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

© 2021 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.

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