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| Interesting Question from Client Posted: 02 Oct 2020 08:55 PM PDT Pension client asked me to determine the amount interest rates would have to increase for the plan to be fully funded. Computing the MV change in the bond portfolio is easy. Then it had me wondering.... on the equity side of the equation what would prompt the fed to raise rates? And what would the outcome be for equity markets? The only rational thing that makes sense is an inflation print way above 2% where the fed gets worried about it running away from them. FOMC has already said they need to see sustained prints above 2% to even consider raising rates. Given the fragile state of the current economy now and for the immediate future, increasing rates would almost certainly constrain consumption with the cost of money increasing. What is the most appropriate way to estimate the impact to equity markets? What do you think is a conservative estimate for downward % shock to equities? Looks like based on LDI portfolio I'd estimate a shock of rates somewhere between +400 to +500 is where they would need to land to get to fully funded. Clearly impact to equity markets has less of an impact than the movements in rates impact to the PBO and bond sleeve. Appreciate anyone's insight on estimate equity selloff for the purposes of this silly question. [link] [comments]  |
| Posted: 02 Oct 2020 04:48 AM PDT |
| Posted: 03 Oct 2020 01:18 AM PDT |
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