Views from the LDI desk: Fall 2025 markets commentary

These moves in the shape of the yield curve have been notable for LDI investors as many pension plans typically focus on overall duration hedge, typically buying longer duration assets due to their capital efficiency. We encourage clients to be mindful of key-rate duration exposure and to consider a custom LDI program to match the liability not just at an overall DV01 level, but also across maturity buckets.

Utilization of a Custom Treasury Portfolio in Liability Risk Hedging

^{Source BlackRock as of 9/16/25}

^{For illustrative purposes only}

^{Current Portfolio modeled as 50% BBG Barclays U.S. Long Government/Credit Index. Indices are unmanaged and one cannot invest directly in an index. Proposed portfolio consists of 27% Long Credit modeled as BBG Barclays US Long Credit Index, and 23% Extended Duration Treasuries modeled as ICE Levered US Treasury Indices, without allocating additional assets to the liability hedging portion of the portfolio. Liability modeled using a set of generic liability cashflows valued with the Bank of America Merrill Lynch AA-Rated US Corporate Market-Weighted Yield Curve with a duration of 12.7. The limitations of dollar durations are approximate, and result may vastly differ as due to estimations and fluctuation in bond values, rates, and payments and sensitive to interest rates changes. The funded status of the plan is assumed to be 100%. Models are for illustrative purposes only, hypothetical, based on assumptions, and subject to significant limitations. Models should not be relied upon as actual results may vary significantly.}

Another positive factor driving the corporate market is that strong technicals have also been coupled with resilient fundamentals. Corporate earnings remain strong with EBITDA growth remaining resilient, and leverage kept under control by limited debt growth. Positive economic growth combined with a relatively low inflation environment is particularly beneficial for corporate fundamentals and supportive of tighter credit spreads. Into Q3 earnings, market participants will look to gain insights into the state of the labor market and any impacts of tariffs flowing through to corporate profit margins.

Looking ahead, technicals remain strong for corporate credit which can keep credit spreads tight despite stretched valuations. Some plans are exploring ways to potentially increase yield and diversify within their credit allocation, such as through adding an allocation to private credit or direct lending.

Diversification does not guarantee a profit or eliminate the potential for loss.

We encourage clients to evaluate their credit spread hedge ratio, in combination with the interest rate hedge ratio, to consider the optimal hedging targets that make sense for their plan. Where plans are limited in capital, it could make sense to prioritize maintaining a higher interest rate hedge ratio vs the credit spread hedge ratio. The optimal credit spread hedge ratio will also likely be dependent on the growth allocation, considering correlation of equity exposures with credit spreads.

Implications for Pension Plans

2025 has so far been another interesting year in markets. The rates market has exhibited steepening, while the credit market has seen flattening. Risk markets continue to perform well. BlackRock estimates that average funded ratios are up an estimated 2.8% YTD, to 107.7%⁵For some pension plans, these market moves present opportunities to make a move on the glidepath, such as considering reallocation from growth, or revisiting the LDI hedge targets for both interest rates and credit. BlackRock can offer expertise and analysis to assist clients with these important strategic decisions for their plan, aiming to help achieve the best outcome for plan participants.

^{The asset class weights are based on 10-K data from the top 200 public corporate pension plans as of 12/31/2024. The data was sourced using Capital IQ and subsequently aggregated and categorized into asset classes by BlackRock. Using the 10-K asset and liability data sourced by Capital IQ, the funded ratio of the top 200 corporate pension plans was estimated to be 104.89% as of 12/31/2024.}

^{No allowance has been made for active management or costs. Asset returns are based on the historical levels of the indices in the table. Liability returns are based on the historical levels of the Bank of America Merrill Lynch Mature U.S. Pension Plan AAA-A Index. Asset and liability returns are rolled forward on a daily basis based on underlying returns to calculate an estimated funded status for the top 200 plans using the estimated pension asset allocation above. Past performance does not guarantee future returns. An index is unmanaged and one cannot invest directly in an index. Neither asset allocation nor diversification can guarantee profit or prevent loss.}