March 3, 2024

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A $700 Billion Insurance Product Is Powering the US Credit Market Rally

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(Bloomberg) — An insurance product that consumers use to help fund their retirements is selling at record levels, powering demand for corporate debt and commercial mortgage bonds.

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Last year, sales of annuities, which allow consumers to effectively buy income for the rest of their lives, reached an all-time record high of $385 billion, according to life insurance trade group Limra. That’s up 23% from the year before. The products grew more attractive as rising interest rates translate into higher potential annual payouts from the products.

Behind the scenes, the life insurers that usually sell annuities are buying bonds to generate income for the products, and in particular, corporate debt and asset-backed securities including mortgage bonds. Their demand might decline a bit this year after bond yields have fallen, but Limra says annuity sales are still expected to remain strong by historic standards.

The insurers’ bond purchases underscore how demand for many debt securities now is driven by demographics, and illustrates why valuations for corporate bonds can remain high even as the Federal Reserve keeps monetary policy relatively tight.

“Key drivers for credit demand at the moment are retail and pensions seeking higher all-in yields, and annuity sales driven by more baby boomers retiring and by a higher level of interest rates giving policyholders higher monthly payments,” said Torsten Slok, chief economist at Apollo Global Management.

Money raised by annuities often goes toward investment-grade debt, usually fixed-rate and ranging between three to 10 years — broadly in line with annuity durations, said Deutsche Bank AG strategist Ed Reardon.

For investment-grade corporate bonds, demand from annuities and other investors catering to retirees are helping to keep valuations high. The average risk premium, or spread, on a company note rated BBB- or higher is 0.95 percentage point, close to the tightest level in the last two years.

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