Attractive annuity yields are in increasingly short supply as long-term interest rates have faltered and there is a likelihood of even more downward pressure.
Let's look at multiyear guarantee annuities as an example. Some MYGAs, a type of fixed annuity product, in the not-too-distant past offered annual yields of more than 5%, guaranteed over a five-year period. Now, financial advisers would be lucky to find a highly rated insurer yielding more than 3%.
"There are not a lot of options right now," said Gregory Olsen, partner at Lenox Advisors Inc. "Insurance companies just can't support it."
The Federal Reserve in July cut interest rates for the first time since the financial crisis, in a move to shore up the economy in the face of the ongoing U.S.-China trade war and signs of weak growth overseas. In remarks on Friday, Fed chairman Jerome Powell kept the possibility of further rate cuts on the table. Some economists envision a return to the rock-bottom rates that prevailed over 2008-15.
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The yield on 10-year Treasury bonds has fallen significantly, to 1.62% as of Aug. 22, since its recent high of 3.24% in November. The yield has fallen more than 100 basis points since the beginning of the year.
Despite the gloomy outlook for interest rates, some insurers with high credit ratings are offering relatively attractive returns relative to prevailing rates.
For example, First Symetra National Life Insurance Co. of New York has a 5-year MYGA yielding 3.1%, according to an analysis from market research firm Wink. (The analysis examined products offered through broker-dealers by insurers with an A.M. Best rating of A- or better.)
Some insurers may also offer higher-payout annuities through certain distributors. Savings Bank Mutual Life Insurance Co. of Massachusetts, for example, 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.
A 3% yield from high-rated carriers is attractive in this interest rate environment, advisers said.
A few insurers offer slightly lower but comparable yields — a product from Reliance Standard at 2.85%, and ones from Nationwide Life, The Standard and United Life at 2.75%.
"They're tough right now because of the low-interest-rate environment," Lee Stadler, a private wealth adviser at Lincoln Financial Advisors, said about fixed-rate annuity yields.
Of course, lower-rated insurers typically offer higher yields on fixed annuities than their better-rated counterparts. Many offer upwards of 3%, and some guarantee more than 4% per year. However, many broker-dealers don't allow their representatives to sell such products to clients. Even if they did, Mr. Stadler doesn't think they are worth the risk.
"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?'"
Of course, some advisers may shy away from locking clients into an annuity product with a multiyear term given interest rates could always rise in the intermediate term. Mr. Olsen doesn't believe advisers should necessarily avoid annuities, though, 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.
Plus, many MYGAs have a 5% or 10% free withdrawal each year, so that may lessen clients' reluctance, he added.