Defined terms for the annuity market and lifetime income landscape.
Breakeven inflation rate is the market-implied expectation of average future inflation, calculated as the difference between the yield on a nominal Treasury bond and the yield on a Treasury Inflation-Protected Security of the same maturity.
The Consumer Price Index is the Bureau of Labor Statistics' monthly measure of the average change in prices paid by urban consumers for a fixed basket of goods and services, and is the reference index for Social Security cost-of-living adjustments and most inflation-linked instruments.
Credit spread is the yield differential between a corporate bond and a US Treasury bond of comparable maturity, compensating investors for the risk that the corporate issuer may default or experience credit deterioration.
Deflation risk is the risk that general price levels fall over time, which raises the real value of fixed nominal claims but strains the solvency of entities that owe those claims and complicates the pricing of new lifetime income arrangements.
Duration risk in the annuity context is the exposure of an insurance carrier's economic position and future contract pricing to interest rate movements, arising from the sensitivity of both assets and liabilities to rate changes and from any mismatch between the two.
