If current financial market conditions continue to boil, without actually causing a meltdown, life and annuity issuers could make a lot more money than usual.
The current uncertainty about U.S. trade policy and other U.S. policies is decreasing the number of buyers hungry for bonds and shares of stock, making the investment markets less liquid, and forcing governments or companies that want to shift to risk to someone else to pay more.
Rob Vince, the president and CEO of the Bank of New York Mellon, one of the biggest banks in the United States, talked about the current thick, sluggish state of the investment markets Friday, during a conference call BNY Mellon held to go over first-quarter results with securities analysts.
"The markets are working fine," Vince told the analysts. "We're just seeing situations where liquidity is reduced and, therefore, people are having to pay up."
What it means: Life insurance policies and annuity contracts are financial burritos filled mostly with high-grade corporate bonds and other types of fixed income securities, such as mortgage-backed securities.
Anything that increases what bond issuers have to pay investors, without leading to a big wave of defaults and rating downgrades, could increase life and annuity issuers' investment returns.
BNY Mellon's assessment of market conditions: BNY Mellon is one of the first companies to release earnings and give a clear description of how it sees the investment markets.
It updated the risk factor list it provides with its earnings uses to reflect the markets' reaction to President Donald Trump's efforts to impose tariffs, or import taxes, on a wide range of imports.
The list now starts with a warning about "escalating tariff and other trade policies and the resulting impacts on market volatility and global trade."
When BNY Mellon posted its results for the fourth quarter of 2024, the list mentioned "uncertainty in the political landscape" but started with inflation.
BNY Mellon executives answered questions during the conference about the new volatility while emphasizing that its results for the first quarter were strong.
The company reported $1.2 billion in net income for the quarter on $4.8 billion in revenue, up from $1 billion in net income on $4.5 billion in revenue for the first quarter of 2024.
In the Treasury market, "the rails of the system are working really well," Vince said. "We're seeing high volumes, yes, for sure, but everything is functioning really well."
But Vince said the trade negotiations may take time and are having a noticeable effect on market liquidity.
The uncertainty in "both the capital markets and the real economy creates elevated risks in the near and medium term," Vince said.
Both in the market for U.S. Treasurys and in the stock market, "the depth at the top of the order book has reduced," Vince told the analysts. "The amount of risk that can be moved at the top of the book is much smaller. You have to go deeper into the book to be able to move blocks of risk."
Vince cited gaps forming between ETF net asset values and the underlying value of the stocks in the ETFs as another concern.
"Those types of things are all indicative of people trying to move blocks of risk, and there's a bit of a consequence to it in terms of liquidity," Vince said.
The corporate bond market: Vince was talking about the Treasury markets and stocks.
Life and annuity issuers invest mainly in investment-grade corporate bonds.
Bond market data posted by the Federal Reserve Bank of St. Louis appear to show, for example, that the spread between the yield on U.S. corporate bonds with BBB ratings and the yield on comparable U.S. Treasuries has increased to about 1.5 percentage points, as of Friday, from close to 1 percentage point in January and February.
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