Life insurers may finally start to get higher interest rates on their investments in corporate bonds, after years of waiting for the interest rate drought to end and rates to turn up.
Life insurers invest about $2.1 trillion of their $4.3 trillion in general account assets in corporate bonds, according to the American Council of Life Insurers.
Corporate bonds are now going through the worst selloff since about 2000, according to JPMorgan Chase & Co. bond index. The selloff is increasing the rates corporations have to pay to borrow money by issuing new bonds.
The shift means that life insurers can get higher rates when they buy newly issued bonds.
Bloomberg is reporting, however, that pension funds and overseas investors are still hungry for U.S. corporate bonds. That could limit how much interest rates will continue to rise.
How Bonds Work
When a corporation borrows money, it is, in effect, renting the money it’s borrowing.
A bond is a security that a corporation can use to borrow money. The interest rate the issuer pays on the bond is the price the corporation pays to rent money from the bond buyers.
Life insurers typically try to “match the duration of their bonds to their liabilities.” That means that life insurers try to buy bonds that will pay off about the same time the insurers will have to make insurance policy benefits payments and annuity contract payments.
When possible, insurers are long-term investors. They hold most of their bonds until the bonds mature.