Interest Rates Outlook – Q2 2020

The second quarter of 2020 has been a devastating and historic moment for the world. Coronavirus (COVID-19) pandemic caused mass suffering to many lives and forced a sudden stop to global economic growth. Given we still lack a vaccine to combat COVID-19, “social-distancing” has been used instead to control spreading. Restricted consumer movement has caused businesses to shut down, jobless claims to skyrocket, financial assets to free fall and policy makers to provide unprecedented measures to support.

Initially, panic mode set in and investors went into “sell-everything” mode. Stocks, bonds, gold, and money markets all took turns expressing their fears. Markets grew concerned over the economic ramifications of a slowdown/shutdown. Furthermore, the nature of the risk this time around felt increasingly linked to personal safety which profoundly affected sentiment, psychology, and behavior.

The Federal Reserve was quick to act, and they responded in big fashion. Officials cut their benchmark lending rate from upper bands of 1.75% to .25%. They injected $1.5 trillion into the U.S. banking system. They committed to unlimited amounts of bond buying (or quantitative easing) to pour even more liquidity into markets. And finally, they created $1 trillion in credit facilities to buttress corporate America in funding short-term expenses like payrolls. Congress followed suit, adding further stimulus of their own to aid our nation. Markets have since stabilized on hopes all this assistance will help Americans through this tough period. However, the investment implication likely mean lower-for-longer will remain for some time.

Yield Curve Shifts:

  • U.S. Treasuries have rallied significantly on COVID-19 related safe-haven flows.
  • Short end of the curve has effectively been reduced to zero on Fed action.
  • Yield curve is no longer inverted given these developments.
U.S. Treasury spot yields (%) March 31, 2020 February 29, 2020 Change (bps) 
1 MONTH 0.02 1.45 -143 
3 MONTH  0.09 1.28 -119 
1 YEAR  0.16 1.02 -86 
2 YEAR 0.25 0.92 -67 
3 YEAR 0.30 0.90 -60 
5 YEAR 0.38 0.94 -56 
10 YEAR 0.67 1.15 -48 
30 YEAR 1.32 1.68 -36 

Source: Bloomberg, Putnam 

What are the implications for ExxonMobil households?  

As many of you know, there are two categories of employees when it comes to their pension/lump-sum options. Those who were born before 1958 and hired before 1998, they take 95% of the quarterly average of the 30-year Treasury Rates, these individuals are given the title of “Grandfathered” category. For those who were born after 1957 or hired after 1997, they use a combination of short term, intermediate term, and long-term corporate bond rates, and as you could guess, these individuals are considered “Non-grandfathered.”  

For the grandfathered individuals, we know that the discount factor for the first quarter and second quarter of 2020 discount rate are 2.25%.  For third quarter 2020, we are now modeling the discount rate to decrease to 1.75%.  This will be officially announced next week.  It is very premature to predict the 4th quarter discount rate currently as the 30 Year Treasury rates have been incredibly volatile. 

Just as a little extra data, here is the ExxonMobil Discount factor for the grandfathered category going back to 2016: 

Interest rates chart

For those in the “nongrandfathered” category, which is anyone born after 1958 or or hired after 1998, it is difficult to easily see the overall impact when short term rates are moving at different speeds, or even different directions. To address this, we estimate an equivalent “single rate” that makes comparison easier. Here is the updated projections we have for interest rates. The official numbers are now announced and listed below, or can be found here: https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates

The first quarter 2020 rates are the lowest they have ever been. For any employee using the “nongrandfathered rates”, the IRS now published the official second quarter rates, which are indicating a slight increase between first quarter and second quarter 2020.

The first quarter 2020 rates are the lowest they have ever been. For any employee using the “nongrandfathered rates”, October had no impact on the effective rate, only November and December determine the discount rate applied to the lump sum for the second quarter. We are saw a very minor increase between the first and second quarter.

We are now modeling projections for the third quarter. Just as with the second quarter rates, the first month of the quarter has no impact on the following quarters discount rates. Said another way, only February and March will determine third quarter rates. February rates were officially announced, at historic low levels. March projected rates have risen dramatically over the past three weeks due to extreme volatility in the bond markets. The recent volatility in corporate bonds has now shifted and caused third quarter projections to now show a slight increase in rates over the second quarter.

Another chart of interest rates

Here is the history for the months are March so you can see how rates moved very dramatically:

third chart of interest rates
Chart of segmented interest rates

For those looking to retire and take advantage of second quarter 2020 interest rates, your Benefit Commencement Date (BCD) will need to be no later than June 1, 2020. In order to process and receive your check on time, your package needs to be return to ExxonMobil benefits by April 25, 2020. Currently it is taking benefits between 3 and 5 weeks to process package. That said, for those considering taking the lump sum, we are now recommending pushing to the third quarter 2020. For those looking to retire and take advantage of third quarter 2020 interest rates, the earliest your Benefit Commencement Date (BCD) can be is July 1, 2020, and no later than September 1, 2020. The earliest someone can request their package for a second quarter retirement is 120 days out, which would be March 1, 2020 for a July 1, 2020 retirement date, and May 1, 2020 for a September 1, 2020 BCD.

Fourth quarter rates will be determined by May and June rates, so it is very premature to project the 4th quarter discount rates, but if we sustain at these levels, we will see a significant increase in the fourth quarter over the third quarter rates. We will start modeling 4th quarter projected rates next week.

We update these numbers, and email out weekly. Please send an email to [email protected] if you’d like to receive weekly discount rate updates.

The pension/lump sum conversation is just one part of any household’s financial plan. We encourage all to review this in conjunction with their financial advisor. Please feel free to reach out if you have any questions.


Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.bogartwealth.comPlease Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Bogart Wealth client, please contact Bogart Wealth, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

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