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Archive for October 22nd, 2008

Pricing Economic Risk into Pension Funding

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While Treasury 30-year bond yields (red circles) were lower by September 30 than at the beginning of the year, corporate bond yields as represented by Moody’s Aaa (blue diamonds) were higher. A spread of about 1.00% at the beginning of the year had widened to 1.70% by the end of the year’s third quarter.

I don’t expect that wide spread to persist far into 2009, if even through the close of 2008. But although some of the contraction of the spread will come via easing of corporate bond yields, long-term government bond yields will likely rise somewhat as the economic crisis shakes itself out.

Several pension prognosticators seem to be expecting contraction of the yield spread, based on comments that have been made about estimated pension funded status levels as of September 30. Since measurement of pension obligations under generally accepted accounting principles is based on corporate bond yields rather than on government bond yields, is is quite correctly observed that declines during 2008 in the values of pension asset equity investments have been partially offset by decreases in the value of pension obligation, due to the higher corporate bond rates.

But at that point, those prognosticators and I part company, since they then proceed to imply or to directly compute how very deeply pension funded status would be further eroded if the yield spread were to return to the beginning-of-year levels entirely via a drop in corporate bond yields, without any corresponding change in the value of pension assets.

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Written by macheide

22 October 2008 at 7:23 pm

Posted in άctuary

Pet Me

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meme from susan


Not enough.

We need a few more cats. And another husband for Gertie to murder. And an aquarium of tropical fish. And some ducks.

And may I have an alpaca, please?

bumper sticker [] - not me

Written by macheide

22 October 2008 at 1:01 am

Posted in not meme