As long-term interest rates falter, attractive annuity yields are becoming harder to find.
In the past, some multi-year guarantee annuities offered annual yields upwards of five percent guaranteed over a five-year period. Today, financial advisers are lucky if they find a highly rated insurer yielding over three percent.
Gregory Olsen, partner at Lenox Advisors Inc., says, "There are not a lot of options right now. Insurance companies just can't support it."
In July, the Fed cut interest rates for the first time since the financial crisis. They did so to shore up the economy in the face of the U.S.-China trade war and weak growth overseas. On Friday, Federal Reserve Chairman Jerome Powell kept the possibility of further rate cuts on the table.
As of August 22, the yield on 10-year Treasury bonds had fallen to 1.62%, down from its November high of 3.24%. The yield has fallen more than 100 basis points since the beginning of the year.
Nonetheless, some insurers with high credit ratings are still offering attractive returns relative to prevailing rates. One example being First Symetra National Life Insurance Co. of New York, who has a five-year MYGA yielding 3.1%.Other insurers may also offer higher-payout annuities through certain distributors, such as Savings Bank Mutual Life Insurance Co. of Massachusetts, who currently markets a 4% 5-year MYGA through some brokers.
By comparison, those rates are better than the current top-yielding 5-year CD offered by Union Bank in Michigan at 3.03%, according to Bankrate.com.
According to some advisers, a three percent yield from high-rated insurance carriers is attractive in this environment.
Speaking about fixed-rate annuity yields, Lee Stadler, a private wealth adviser at Lincoln Financial Advisors, said, "They're tough right now because of the low-interest-rate environment.”
Lower-rated insurers still offer higher yields on fixed annuities than their better-rated counterparts - many offering upwards of three percent. However, many broker-dealers don't allow their representatives to sell such products to clients. And Mr. Stadler doesn't think they are worth the risk, even if they did.
"I wouldn't even consider it," he said of putting a client in a 4%-yielding annuity from a low-rated insurer. "That would scare me. I would think, 'What's the catch here?'"
In the meantime, some advisers are staying away from locking clients into an annuity product with a multiyear term because interest rates could rise in the near future. Nonetheless, Mr. Olsen doesn't believe advisers should avoid annuities because of that possibility. "Folks have been predicting for the last 10 years that interest rates are going to rise, and all they've done is stay low or go lower," he said.