Discount rates for evaluation of future values
FRED recently added high quality market bond yield curve data from the U.S. Treasury. These are interest rates computed from high-quality commercial bonds to reflect the market’s thinking about how much it’s discounting future incomes with minimal risk. The U.S. Treasury needs these measures to evaluate the current value of liabilities in pension funds. You do this properly by using various maturities—from 6 months to 100 years in 6-month intervals. This produces an interesting yield curve. We focus here on the 100-year example. Obviously, there’s no commercial bond out there with a 100-year maturity right now. The calculation intrapolates for the various maturities and in this case likely extrapolates. We’re wondering, though, how a 100-year discount rate rate could be useful for pension liability pricing, as no employee alive today would reasonably expect to receive a pension distribution a century from now. However, this can be useful for other purposes, such as evaluating the usefulness of infrastructure with long lifespans or the impact of climate change. Note also that this 100-year rate has been decreasing significantly, just as all the others have, showing that the current interest rate environment has an effect far into the future.
How this graph was created: Search for “HQM bond” and, surprisingly, the 100-year rate is among the top choices.
Suggested by Christian Zimmermann.
View on FRED, series used in this post: