Spreads Widen for Top Yielding Fixed Annuities Despite Trouble in Treasury Market

Published June 5, 2019
  • The highest yielding fixed annuities have become more attractive than CDs on a relative basis
  • The highest yielding fixed annuities are often from insurers with ratings of B++ or lower, so be aware of counter-party credit risk
  • Fixed annuity rates tend to move down slower than Treasuries in a falling rate environment

Typically, fixed annuity rates are above US Treasuries of the same maturity, and their rates tend to move in the same direction. In this article we’ll show you a few graphs to provide more detail on what’s going in the annuity market today, how that relates to movements in the US Treasury market, and what all of this means for you as you consider an annuity purchase.

First, let’s look at Treasury yields. The chart below shows the 5 year Treasury yield over the last six months. You’ll notice that yields have come down significantly since reaching a high point in November 2018. They are now at their lowest point in nearly two years.

blueprint-income-5-year-treasury-yield

Now, let’s add average 5 year fixed annuity rates. The average fixed annuity rate is the average across the highest rate that was available in any month for every credit rating on the Blueprint Income platform.

blueprint-income-5-year-treasury-5-year-fixed-annuity

And, let’s add the highest available 5 year fixed annuity rates across all credit ratings.

blueprint-income-5-year-treasury-5-year-highest-average-fixed-annuity

Finally, here’s a quick chart showing the difference between the highest 5 year fixed annuity rate and the 5 year Treasury yield at the beginning of each month over the last six months. You’ll notice a pretty steady climb in that difference or “spread” that continues all the way to today.

blueprint-income-5-year-treasury-5-year-fixed-annuity-spread

Here are a few takeaways from this analysis.

First, if you’re looking to earn a preset interest rate for a set period of time and you’re comparing a fixed annuity to something like a CD, the highest yielding fixed annuity has become more attractive on a relative basis.

Second, the highest yielding 5 year annuity is from Equitable, an insurer with a B rating. We set a ratings cutoff of B for fixed annuities (and A for income annuities), so keep in mind the counter-party credit risk is higher the lower the rating. That’s part of a well-functioning financial market — there’s should be a direct correlation between risk and return. It’s important to understand the investment strategy the insurer is using to generate expected returns that are over and above Treasury yields, or what is often referred to as the “risk-free rate.”

Finally, our recent observations have been that annuity rates tend to move up slower than Treasuries in rising rate environments and down slower that Treasuries in falling rate environments. Treasury yields have been falling, and market sentiment is now that the Fed will cut rates this year. Bear in mind that if you’re thinking about an annuity purchase in the near-to-medium term, it might be a long time before annuity rates get back to their late 2018 levels.

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Nimish Shukla

Nimish Shukla

Financial Planning Professional

Nimish has spoken with thousands of customers about retirement spending. As a CFA Charterholder and licensed fixed annuity producer he values the importance of building an income stream for retirement. In addition to his work at Blueprint Income he is also a regular contributor to Nerdwallet.

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