Could AIFs be a cure for falling bond prices? – InsuranceNewsNet

Price increases were widespread across all sectors of the economy in 2021, according to the Federal Reserve’s Beige Book (December 2021). Rising interest rates have pushed bond prices down, posting their first losses since 2013, and the prospect of a continued rise in interest rates could negatively impact bond markets in 2022. Support for the Fed’s bond buying is expected to end in March 2022, increasing the likelihood of rate hikes thereafter in 2022 and 2023.

All of this comes against a backdrop of continuing retirement demographic trends that show retirees living longer and, in many cases, bearing more of the burden of their income needs; therefore, they must save more. Additionally, many retirees have considered retiring earlier due to broader consumer trends such as the “great quitting” as the pandemic continues to prompt many to redirect their careers or exit the labor market. work earlier. With these and other factors affecting common methods of retirement savings, there is growing concern among investors and their financial advisors. How can they combat the impact of rising rates on fixed income market values ​​and continue to earn competitive interest to accumulate assets for retirement?

While bonds have traditionally provided a source of stability for portfolios, acting with little or no correlation to volatile equities, they may be less effective going forward. Prices of fixed rate bonds generally fall as rates rise, which can expose clients to loss of capital and low total returns.

Navigating Rising Rates

Floating rate securities offer certain advantages because they periodically adjust to prevailing market rates. This helps an investor to take advantage of rising rates. However, there is no guarantee that they will move as quickly as the market to match current rates, so investors still face interest rate risk and could underperform the market.

An innovative alternative to floating rate bonds comes in the form of a new class of fixed annuities with an adjustable rate mechanism. Floating rate annuities work in the same way as floating rate bonds, but are tax-deferred products that guarantee clients’ capital while allowing them to benefit from rising rates. Financial professionals should consider the use of variable rate annuities for the shorter-term portion of client portfolios and funds that they seek to protect against market and interest rate volatility. Variable rate annuities could be a complement to interest-bearing CDs, money market funds and bank accounts, as well as other more conservative products.

Rising rates can also wreak havoc on the stock market, but are not necessarily bad for stocks over the long term. A slight rise in rates could signal strong and growing economic conditions, which could translate into higher earnings and, subsequently, higher stock prices. However, there can often be a lot of volatility along the way, and there is no guarantee that stock prices will rise in the short term.

When rates go up, bonds go down: an alternative approach

From an industry perspective, advisors equipped with the right technology and resources have been able to adapt to the challenges of COVID-19 by shifting to digital meetings and customer service. The annuity industry has kept pace and also become more efficient, with digital ticketing and service now the rule rather than the exception. And like variable rate annuities, other innovations have come to market that serve as viable alternatives in clients’ portfolios.

Advisors and their clients can consider using a new generation of fixed indexed annuities, for example, which offer accumulation potential and tax deferral while guaranteeing capital. Financial professionals have not sold AIFs as widely in the past, but have given them a new look as potential replacements for bond funds.

When interest rates rise, bond prices fall. As recently as 2018, the last time the Federal Reserve raised rates, the Bloomberg US Aggregate Bond Index turned negative. Given the current economic environment, with inflation at a 40-year high, we are likely expecting a series of rate hikes from the Federal Reserve. And if history repeats itself, bond funds could potentially experience the same negative returns. Could finance professionals consider AIFs as a different solution in this next rate cycle?

Rethinking the 60/40 rule

A traditional 60/40 portfolio, with 60% stocks and 40% bonds, has been a common asset allocation for decades. Advisors can use CRFs in several ways to rethink the 60/40 rule.

For example, an adviser working with a relatively aggressive investor might replace an AIF with bonds or bond funds as part of the conservative portion of their portfolio (part of the 40%). This would give them greater accumulation potential, as the interest is indexed to a stock market index and not to interest rates. Meanwhile, an advisor working with clients who are already retired or have a lower risk tolerance can use an AIF to replace or reduce exposure to more aggressive investments on the risk spectrum that have probably accumulated considerably over the past few years. This can help bring their portfolio back to an overall equity/fixed income ratio consistent with their risk tolerance (back to 60/40 or 50/50, or even 40/60 for people already in retirement who have a time horizon shorter).

The benefit is that a client can have a portfolio with a higher weighting to fixed income/conservative investments while still maintaining upside potential with market index indexed FIA returns. This could be an advantageous approach for those who don’t want to take on the risk of a pure equity fund, but still want the potential for accumulation tied to equity performance.

AIFs can be a solution that meets a wide range of end-user needs. Of course, under no circumstances would 100% of a portfolio be suitable for a fixed index annuity, but the decision to move a certain percentage of clients’ assets into an AIF could prove beneficial to clients now and in the future. .

The Potential of Annuity Products in the Event of Rate Changes

Recent innovations in annuities have increased confidence and made these products a viable retirement solution for more advisors in the market. In addition, most bond funds experience losses in market value in a rising rate environment, unlike most annuities (if held for certain periods). In summary, fixed-index and fixed-index annuities can be a smart option for advisors to offer in their practice, especially when considering:

» The interest rate environment and outlook (current forward rates point to higher rates).

» The stock market environment (volatility has increased recently).

» Strategic and tactical approaches to retirement planning.

» Increased efficiency in the annuity market.

» The new generation of annuities now available.

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