What’s Next For Interest Rates and Annuity Rates (September 2020)

Published September 3, 2020
Treasury yields are low by historical standards, and the Fed says it “will likely aim to achieve inflation moderately above 2 percent for some time”. What does this mean for the annuity market?

I’m probably not the first to tell you that current Treasury yields are low by historical standards. Here’s a table showing yields for specific maturities as of 9/1/2020.

Treasury Yields 9/1/2020

Source: Treasury.gov. All figures shown as percentages.

 

You’ll notice that yields are all at or below 0.14% for the next three years, meaning the market believes that the chance of the Fed raising interest rates at all over that period is small. When the Fed conducted a recent survey of 20+ banks that act as their primary dealers, the median guess of when the Fed would raise rates again is the first half of 2024.

This leads to the next point of analysis — pronouncements by the Fed itself. Last week, Fed Chairman Jerome Powell made news with a speech where he signaled a bigger focus on getting inflation up to a 2% average. Since 2012, the Fed has had a formal inflation target of 2%. But it’s also the case that over almost that entire time period, realized inflation was below 2%. This caused the Fed to revise its guidance.

Now, the Fed says it “will likely aim to achieve inflation moderately above 2 percent for some time” in order to get the long-run average closer to 2% than it currently is. The Fed also made some changes to how it targets full employment.

Taken together, “allowing for low rates of unemployment and inflation overshooting makes it highly unlikely that the Fed will raise interest rates before inflation has been above 2 percent for some time,” according to David Wessel at the Brookings Institute

What does all of this mean for the annuity market?  Locking your money up for longer, especially if you’re able to get a fixed annuity with an attractive APY, shouldn’t feel like as much of a risk as it once did since it’s hard to imagine missing out on a better interest rate environment any time soon. Investing in those CDs that mature in 6 months or 12 months in the hope that rates will be higher by then? It’s always possible things pan out that way, but the capital markets are telling us it’s highly unlikely. 

Consensus in the markets may be wrong (it certainly has been at many points in the past!), but it’s worth noting that the consensus as of today is clearly a low interest rate environment for a long period of time.

See the Latest Fixed Annuity Rates Here

Matt Carey

Matt Carey

Financial Planning Professional

Matt Carey is the co-founder and CEO of Blueprint Income. He believes in the power of technology to make retirement simpler. Matt is a regular contributor to Forbes.com and has been quoted in both the New York Times and Morningstar.

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