What is going on with Fixed Annuity Rates and Indexed Cap Rates?

The past few weeks I have been hearing the same two questions fairly often:

Why are fixed annuity rates coming down if the Fed keeps raising interest rates?

Why are indexed cap rates coming down if the market has been doing well?

It is important to understand where product performance comes from.

As a rule of thumb, Fixed Annuity Rates follow 10 Year Treasury yields, not the Fed Fund rate. Since November, 10 year Treasuries are down ~20%. Barring a turn around in yields, you can expect Fixed Annuities yields to continue declining.

On to the second question. Indexed cap rates are not affected by market performance, but rather by a mix of market volatility and interest rates. This is due to the cost of options increasing with greater market volatility and decreasing through times of market stability.

The role interest rates play in cap rates is that the overall “option budget” for any given product comes from a account that is largely invested in Fixed Income products.

So, with continued low interest rates and higher market volatility, carriers options budgets are simply not enough to maintain current cap rates.

These answers are oversimplifications, but they should give you a decent idea of where to start when you have questions about certain product mechanics.