FROM: Lisa Sorani, Manager of HR Employee Services LS -

LOOKING FORWARD: CONCLUSIONS
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• Conclusions
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It is important to reiterate that while the alternative scenarios presented are quite worrisome especially
when taken to the limit case, these are not the most likely future path for interest rates
Investors will want to plan for the likely l evolution of the current interest t rate environment to be
relatively close to the base case
However, it is important to see the possible alternative ways that the current environment could unfold
over time
The goal is for Plan Sponsors to identify the possible negative outcomes
Think about situations in terms of what are the:
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Known-Knows: We know interest rates are at historic lows; interest will likely increase some point in the future;
Fixed Income investors face capital losses in an increasing interest rate environment; Fixed Income will provide
significantly lower returns going forward than they have in the past
Known-Unknowns: What we don’t know is for how long interest rates will stay low; how fast they will increase;
if inflation will rise; how the Government will react to increasing debt service costs; if the Fed will favor economic
growth over price stability; if the Fed will favor price stability over interest rate stability
Unknown-Unknowns: By definition we don’t know all the factors that may impact Fixed Income investors, in
this case you have to use your imagination for thinking of scenarios that are seemingly improbable; for example,
China deciding to let their currency free float which would no longer bind them to purchasing US Treasuries
Pension Consulting Alliance, Inc. ││ EBMUD Fixed Income Discussion │ 42