Displaying items by tag: yields

Annuity sales are expected to remain strong in the coming year on the heels of another record breaking year of sales in 2023. Whether 2024 sees another record year of sales ultimately depends on the economy and interest rates. Notably, the Life Insurance Marketing and Research Association (LIMRA) sees these favorable economic trends, such as volatility in financial markets and uncertainty about the economy and Fed policy, continuing. 

LIMRA notes that rates are likely to continue declining, which could also lead to a surge of sales as buyers may be eager to lock in rates at these levels. If financial markets continue to move higher, demand for products with lower risk like fixed indexed annuities and fixed-rate deferred annuities may decline while demand for registered indexed-linked annuities will climb. 

2023 was rare as nearly all categories saw growth. The highest rates in decades propelled sales of fixed annuities, while uncertainty around the economy and monetary policy drove growth for annuities offering downside protection. 

If the Fed does start to cut rates as anticipated, LIMRA projects that sales growth will eventually be impacted especially for more rate-sensitive products. In total, it forecasts sales between $311 billion and $331 billion depending on the trajectory of interest rates. 

Finsum: Annuity sales are forecast to remain strong in 2024. However, sales could slow when the Fed does actually start cutting rates as this would impact returns. 

Franklin Templeton is optimistic about fixed income in the coming year due to the Federal Reserve ending its hiking cycle, and inflation continuing to trend lower. However, it believes that rates will remain at these levels for much of 2024 in order for inflation to fall to the Fed’s desired level, leading to a more challenging environment in the first-half of the year. 

Amid this backdrop, the firm is bullish on municipal bonds especially with so many investors on the sidelines, overweight cash, or in short-term credit. Municipal bonds offer historically attractive yields, favorable tax treatment, and a longer-duration which should outperform in an environment with falling rates and a flattening yield curve. 

The firm notes that local governments remain in strong shape from a fiscal perspective even despite a slowdown in economic activity and rising costs. Many still have excess funds leftover from federal aid during the pandemic and have been relatively disciplined in terms of spending. Further, muni bonds have lower default rates than corporate credit while also having higher after-tax returns. Franklin Templeton believes many investors will reallocate from money markets into municipal bonds in order to lock in yields at these levels especially as monetary policy eases. 

Finsum: Franklin Templeton is bullish on fixed income in the coming year. It also highlights a bullish case for municipal bonds due to the sector’s strong fundamentals and favorable positioning in this macro environment. 

Annuity sales hit a new record high in 2023 at $360 billion which exceeded last year’s record of $311 billion. Experts attributed this to a combination of anxiety about stocks and the economy paired with the high interest rates in decades. 

Typically, annuity sales spike during periods of economic uncertainty. However, sales had been muted over the last decade due to the prevalence of ultra-low interest rates. This is evidenced by 2008 being the last year that annuity sales exceeded $250 billion prior to 2022. 

Currently, the majority of annuity sales are fixed-rate deferred annuities which pay an average of 4.5%. Prior to the Fed’s tightening campaign, this annuity paid 1.5%. In contrast, sales of single premium indexed annuities and deferred indexed annuities were much lower. 

These annuities are the simplest as the buyer hands over a lump sum in exchange for an income stream that lasts through their life. They are also the most effective in terms of hedging longevity risk for clients. However, there is a tradeoff in terms of liquidity and being unable to access the money once it’s put into the annuity. In contrast, fixed-rate deferred annuities do have more liquidity and offer higher rates but come with higher costs.

Finsum: Annuity sales hit a new record high in 2023 due to fears of a recession and inflation in addition to high interest rates. 

We are nearing the end of one of the most aggressive periods of monetary tightening in history. Since March 2022, the Federal Reserve has hiked 11 times, sending the benchmark rate above 5%. At the latest FOMC meeting, Chair Powell left room open for more hikes if necessary, but the overall message was that inflation was moving closer to desired levels, while the economy remained resilient. 

Most market participants are now focused on the Fed pivoting and cutting rates sometime in 2024. Therefore, it wouldn’t be prudent to hold off on investing in an annuity or other sort of fixed interest investments in the hopes of securing higher rates. In fact, we are starting to see cuts on some annuities for the first time in years, following the recent decline in longer-term yields

For most of the year, ‘higher for longer’ has been the prevailing narrative. Yet, there are many indications that we are in the final innings of the hiking cycle such as a cooling labor market and moderation in inflation. Additionally, public comments from Fed officials have indicated the need to cut rates if inflation does moderate to keep real rates from climbing even further. 

Currently, annuities are at their highest payout rates in decades. Given the likelihood that we are in the midst of a Fed pivot, prospective buyers of annuities should take advantage of these attractive rates before they start to drop. 

Finsum: Fixed annuities are quite attractive given the current level of rates. Yet, there are some signs that interest rates are going to turn lower which means that this is an opportune time to invest in an annuity.  

Every industry changes and evolves with time. The financial advice industry is no different as advisors increasingly move towards focusing more on financial planning and serving clients with less emphasis on making investment decisions.

This is now being increasingly handled by asset managers and third parties. Currently, about 10% of advisors use home office model portfolios with minimal modifications. 36% of RIAs and independent broker-dealers are building their own allocations from scratch. Most advisors are taking a blended approach by using these models as a starting point and then offering some customization to suit a clients’ specific needs. 

For advisors, the shift makes sense especially as most clients seem to value planning more than performance. Further, it frees up time and energy that can be spent on client service and growing the business. According to Cerulli, advisors who build their own portfolios, spend about 30% of their time on the task. 

Another benefit for advisors is that it makes the business more scalable. For advisors who spend considerable time on portfolio management, there is more of a constraint to how many clients can be added. An interesting finding is that firms with large amounts of assets under management are more likely to use model portfolios. 

Finsum: Model portfolios are becoming increasingly popular, although most are currently using a blended approach. Here are some of the major benefits to advisors.