Why US Treasuries affect annuity pricing

US Treasuries drive annuity pricing as much as gilts, according to the latest pensions spotlight.

Writing in the October edition of Money Management, Bob Campion argues that if gilts are the king of markets for annuities, US Treasuries are the queen.

“If gilts are the king then US Treasuries are without doubt the real power behind the throne,” Mr Campion says. “The yield on a 10-year US Treasure bond is the global risk-free rate that heavily influences the price of all other local benchmark government bond yields around the world.”

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When gilt yields rise, he says, everything changes because corporate bonds are priced based on the amount of risk these bonds represent above the risk-free rate.

The impact of the markets at the moment mean clients a fair way from retirement might want to rethink their approach to growing their retirement pot.

“For clients still some way off retirement who may have taken a relatively cautious approach, now might be the time to reconsider that strategy, if they have not already done so,” Mr Campion says.

“Low-risk assets that are at serious risk of capital loss are not low-risk in any meaningful sense, and that is the position that gilts have been in all year.”

Mr Campion looks further into the relationship between Treasuries and gilts – and the resulting impact on markets and retirement income – in the October pensions spotlight.