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.
Falling rate environment effects on annuity pricing are the changes in payout rates on newly issued contracts, mark-to-market position of existing bond portfolios, and reinvestment economics on maturing assets that occur when prevailing nominal interest rates move lower over a sustained period.
