For life insurance professionals who have long had difficulty selling interest rate-sensitive insurance products because of abysmally low yields, 2014 should bring welcome relief. Interest rates are due to rise — and stay on an upward path through 2018.
This forecast, part of a wide-ranging industry outlook, was one of several predictions made by Alliance Bernstein Chief Investment Officer Douglas Peebles, who presented the kick-off morning session of the company's 2013 Insurance Symposium in New York City on December 5th.
The all-day gathering, attended by life insurers' home office investment professionals, examined the opportunities and challenges that carriers will face as they seek to implement long-term investment decisions and optimize risk-adjusted returns. The following is a recap of key developments Peebles said to expect next year.
1. Fed's tapering will happen in March.
A major factor underpinning the rise in rates, said Peebles, are market expectations over the Federal Reserve's plans, announced by Fed Chairman Ben Bernanke earlier this year, to "taper" or pull back from the monetary policy known as quantitative easing. The latter aims to stimulate the economy by having the Fed purchase assets of longer maturity than short-term government bonds, and thereby lower longer-term interest rates.
A third round of quantitative easing, QE3, was announced in September of 2012. Then in June, the Fed disclosed plans to reduce its monthly bond purchases to $65 billion from $85 billion. But on September 18, the central bank postponed the reductions. When polled about a likely resumption date, most symposium attendees indicated next March.
Image: Federal Reserve Chairman Ben Bernanke attends the opening of the College Fed Challenge National Finals at the Federal Reserve Board of Governors in Washington, Monday, Dec. 2, 2013. The team competition for undergraduate students analyzes economic and financial conditions and formulate a monetary policy recommendation, modeling the Federal Open Market Committee. (AP Photo/Jacquelyn Martin)
2. Yields on Treasuries will rise to 5 or 6 percent by 2018.
Regardless, Peebles noted, the market's concerns about tapering are already having an impact, draining money from bond funds — and boosting interest rates. This year, the five-year forward rate on five-year Treasury notes increased to 4.5 percent from three.
A chart displayed by Peebles forecasted yields on five-year Treasury notes rising to between 5 and 6 percent through year-end 2018. Tapering also is expected to impact the Federal Funds rate — the interest rate at which depository institutions actively trade balances held at the Fed— as yields rise from just below one percent currently to a forecasted four percent by year-end 2018.
3. Positive returns on T-bills are expected through 2018
As rates rise, said Peebles, insurers can look forward to continuing positive returns on U.S. Treasuries, including 5-year notes (a projected 1.5 percent total return at year-end 2018), 10-year notes (1.36 percent) and 30-year notes (0.27 percent). Peebles expressed concern, however, about the impact of rising rates on asset prices.
