The stock market and people looking to buy houses and cars are anxiously yearning for rate cuts, but this brief note is going to focus on the positive, the glass-half-full, side of higher rates. Today’s high, by recent standards, interest rates make achieving longer-term investment success much more attainable and are a large benefit to companies and organizations with long-term obligations.
The chart below shows the estimated quarterly surplus or deficit of 100 largest U.S. public company pensions since 2000. Higher interest rates are responsible for changing the pension funded deficit of $420 billion in 2016 into a $73 billion surplus today. Without getting into the math, discounting long-term cash flows by a higher interest rate reduces the present value of the liability. Pensions calculate the present value of their liability, but even if your organization does not calculate the present value of its future spending, higher interest rates make the present value of that future spending smaller and improves the chances of successfully funding them.
After years of repressed interest rates, today’s higher interest rates are unpleasant for some, but for savers and allocators they can be a reason to be upbeat.