Upward yield curve

An upward sloping yield curve is one in which longer-maturity bonds have a higher yield than shorter-term bonds.

This is the most common shape because longer-maturity investors generally demand a premium to compensate the additional volatility associated with longer-duration investments.

An upward sloping yield curve gives investors a sense of expected economic growth.

Inverted yield curve

An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields.

Experience has shown an inverted yield curve has been a fairly reliable predictor of economic downturns.

Flat yield curve

A flat yield curve is one in which the shorter- and longer-term yields are very close to each other.

What these yield curves mean for you

As a rule, the more mature a pension plan is, the more its discount rate will be reliant on the shorter-term bonds. Less mature plans are more sensitive to the longer-term yields. The effective discount rate describes how the yield curve is used to calculate a pension liability as a present value of future benefit payments.

The graph below shows how the effective discount rate changed during 2019 for two plans — a mature plan with a duration of eight years and a younger plan with a duration of 14 years. Duration measures the sensitivity of a pension plan’s liability to changes in interest rates.

See how bond yields and investment performance affect a pension plan’s funded ratio over 12 months

Every quarter, Segal and Segal Marco Advisors examine the effect of changes in the assets and liabilities of a model private sector single-employer pension plan on its funded ratio over the four most recent quarters, viewing such changes through a marked-to-market lens.