- Retirement-age Americans are behind the US credit rally, Bloomberg said, citing LIMRA data.
- Annuity sales hit record highs in 2023, as higher interest rates pushed up their premiums.
- Annuity sales could total $693 billion between 2024 and 2025, but demand will be subdued as the Fed cuts interest rates.
Bloomberg, citing data from life insurance trade association LIMRA, reported that high demand for annuities is a key driver behind the surge in credit markets.Thank you for reading this post, don't forget to subscribe!
In 2023, $385 billion of annuities were sold, a 23% gain over the previous year and a new all-time record.
Retirement age consumers have begun to invest in insurance products as rising interest rate levels offer higher annual payouts. Once purchased, these contracts provide customers with periodic payments from the life insurer. Companies generate income by investing in debt assets such as corporate bonds and mortgage-backed securities.
The tight spreads on investment-grade corporate debt are evidence of high demand, with the average risk premium on BBB- notes being 0.95 percentage points. That’s below the average of 1.49 percentage points over the past two decades, according to Bloomberg data.
Annuities are increasing as the U.S. population ages, with 2029 being the estimated date when even the youngest boomers will reach retirement age 65.
Limra’s December note estimated that annuity sales could remain strong between 2024 and 2025, totaling up to $693 billion.
“While interest rates are expected to peak in 2023, the 10-year Treasury rate is forecast to remain around 4% through 2026. This modest decline will dampen sales growth in 2024, particularly for income annuity products and fixed For rate deferred products,” the group said. “Countering this has led to a turnaround in equity markets and is expected to see annuity sales grow again in 2025.”
Credit markets have enjoyed a more broad-based bounce recently, as macroeconomic conditions have forced the Federal Reserve to raise interest rate levels to a range of 5.25%-5.50%.
This has led to a rise in credit yields, and fixed income is beginning to offer equity-like returns. Some on Wall Street expect interest rates will never return to the near-zero levels seen over the past decade, which makes debt attractive for long periods of time.
In the final months of 2023, bets that the Fed could soon make a policy change fueled the largest inflows into corporate debt since 2020. High-yield junk bonds particularly benefited, as investors took a more risk-on attitude.