Retirement-Age Americans Driving US Credit Rally and Record Annuity Sales, Bloomberg Reports

New York, NY – Annuity sales in the US hit a record high in 2023, driven by retirement-age Americans seeking higher interest rates to boost their premiums, according to data from the life insurance trade association LIMRA. Bloomberg reported that a total of $385 billion in annuities were sold, marking a 23% increase from the previous year and setting a new all-time record.

These contracts provide customers with periodic payments from a life insurer, while companies generate income by investing in debt assets, such as corporate bonds and mortgage-backed securities. This surge in demand has led to tight spreads on investment-grade corporate debt, with the average risk premium on BBB- notes standing at 0.95 percentage points, below the 1.49 percentage point average of the last two decades, as outlined by Bloomberg data.

As the US population continues to age, annuities are expected to have a growing presence, with a projected total of $693 billion in annuity sales between 2024 and 2025. However, demand for annuities is forecasted to decline as the Federal Reserve cuts interest rates, particularly for income annuity products and fixed-rate deferred products. The expectation is that annuity sales will rebound in 2025 with the anticipated turnaround in the equity markets.

The broader credit markets have also experienced an upside swing, with the Federal Reserve raising interest rate levels and boosting credit yields. This has led to fixed income offering equity-like returns, making 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 have especially benefited from this trend, as investors have taken on a more risk-on attitude. Overall, the surge in annuity sales and the positive momentum in the credit markets indicate a changing landscape for retirement-age Americans seeking to maximize their investments.