Retiring baby boomers are driving a US credit-market rally

• Retirement-age Americans are behind the US credit rally, Bloomberg said, citing LIMRA data.
• Annuity sales reached a record high in 2023, as higher interest rates boosted their premiums.
• Annuity sales could total $693 billion between 2024 and 2025, but demand will dampen as the Fed cuts interest.

Sky-high demand for annuities is a leading driver behind rallying credit markets, Bloomberg reported, citing data from the life insurance trade association LIMRA.

In 2023, $385 billion in annuities were sold, marking a 23% gain from the prior year and a fresh all-time record.

Retirement-age consumers have piled into the insurance product, as rising interest rate levels offer elevated annual payouts. Once bought, these contracts provide customers with periodic payments from a life insurer. Companies generate income by investing in debt assets, such as corporate bonds and mortgage-backed securities.

Tight spreads on investment-grade corporate debt are evidence of high demand, with the average risk premium on BBB- notes standing at 0.95 percentage points. That's below the 1.49 percentage point average of the last two decades, Bloomberg data outlined.

Annuities have a growing presence as the US population ages, with 2029 the estimated date by which even the youngest boomers hit the retirement age of 65.  

A December note from LIMRA estimates that annuity sales could remain strong between 2024 and 2025, collectively totaling as much as $693 billion. 

"While interest rates are expected to peak in 2023, the forecast for the 10-year Treasury rate is to remain around 4% through 2026. This slight decline will dampen sales growth in 2024, particularly for income annuity products and fixed-rate deferred products," the group said. "Countering this is the turnaround in the equity markets and the expectation is annuity sales will rebound in 2025."

Credit markets have more broadly enjoyed an upside swing recently, as macroeconomic conditions forced the Federal Reserve to raise interest rate levels to a range of 5.25%-5.50%. 

This has boosted credit yields, and fixed income has come to offer equity-like returns. Some on Wall Street expect that interest rates will never return to the near-zero levels seen in the past decade, which makes credit attractive for the long-term.

In the final months of 2023, bets that the Fed might soon pivot policy fueled the biggest inflows into corporate debt since 2020. High-yielding junk bonds especially benefited, as investors took more of a risk-on attitude.