The impact of the coronavirus has made for a crazy couple of weeks in the financial markets. Bonds are comfortably below 2 percent and the 10-year Treasury yield is hovering around 1.3 percent. At the same time that long Treasury yields are making new historic lows, credit spreads, while widening, remain relatively tight. I am not saying the worst is over, but it is time to take a break and assess the next moves.
By Scott Minerd, Chairman of Investments and Global CIO
We are trying to buy as many high-quality longer-duration assets as possible at reasonable yields to help lengthen duration in the face of potentially lower rates, but 3 percent is becoming a difficult yield to reach. We are selectively adding to BB credits which we think are “money good” to certain accounts to enhance yield. Eventually, we may have an opportunity to add more risk assets to our client portfolios as economic growth slows around the world and corporate borrowers default. The chances of recession are rising rapidly, for which we are well positioned.
by Scott Richardson, CEO/President of IZALE Financial Group
Despite lower corporate tax rates and a narrower spread between traditional bank-eligible investments and Bank/Business-Owned Life Insurance, BOLI continues be a powerful asset for your balance sheet. The earnings are competitive for the risk and accrue without any tax provisions. The book value is stable - rising interest rates won't result in mark-to-market adjustments like with bonds. At its core it's still life insurance and we've seen firsthand how the life insurance proceeds have provided invaluable benefits to an insured officer's family as well as to the institution.
BOLI crediting rates have remained somewhat stable since the beginning of 2018, and programs that deliver 3% or more yield out of the gate are readily available. While those rates have remained stable, market rates have moved generally upward even if in fits and starts. As of March 25, the 10-year Treasury bond was a mere 3 bps higher yield than the 13-week Treasury bill (with an inversion with shorter duration); the result is about 75bps-100bps of spread between 10-year Treasuries and BOLI. That's down from the historical average of over 200bps. That narrow spread has many institutions re-evaluating their inforce BOLI or delaying their next purchase of it. The thought goes that until there is greater reward for the risk of going longer, stay short.
Ignoring the immediate lost earnings from staying on the sidelines, trying to time entry to the markets is challenging to say the least. What if instead of measuring your BOLI returns against fixed-income assets like bonds, you could measure them against an equity-index? Before you get too far on the ledge - we're not talking about exposing cash value to an index; cash values will always have stable book value treatment. What we're talking about is a transparent way to determine the crediting rate by measuring the change in an index, most commonly the S&P 500.
"Indexed Universal Life" or IUL has been available on a retail basis for more than 20 years, and in 2018 IUL accounted for almost 30% of permanent life sales. While widely available on a retail basis, it wasn't until recently that IUL became available with a single-premium, 100%-beginning-cash-value design associated with BOLI.
With IUL, the carrier offers a "floor" or minimum crediting rate (along with full book-value treatment) and a "cap" or maximum crediting rate that can flow from the change in the index.
IZALE Financial Group
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