The economy has been facing strong inflationary pressure, with the Consumer Price Index rising 7.9% in February, its highest monthly gain since January 1982. Last week, the Fed approved its first interest rate increase in more than three years and plans to increase rates several more times this year. In addition, experts expect Treasury yields to continue rising over the next 12 months.
Higher-than-expected inflation data may compel the Fed to raise interest rates more aggressively than originally forecasted to keep inflation in check. Higher interest rates and Treasury yields bode well for financial companies, including insurers. Higher bond yields increase the risk-free returns of insurance companies because they invest in high-grade fixed-income instruments to meet their promised returns to policyholders. Investors’ interest in insurance stocks is evidenced by the SPDR S&P Insurance ETF’s (KIE) 15.8% gains over the past year.
