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By Boyd Erman

Manulife Financial Corp. (MFC) says its earnings will come back when equity markets and interest rates do.

That's a pretty interesting statement on a day when U.S. Treasury yields, the benchmark for interest rates, are plumbing depths rarely seen.

The 10-year note is hovering at 2.9% and the two-year note is at 0.54%, just 3/100 of a percentage point above a record low.

On the upside for Manulife, it's hard to believe rates can go much lower, which is a bonus for a company that says each percentage point drop in rates reduces earnings by $2.7-billion.

Source: Federal Reserve Bank of St. Louis

But how much of the $1.5 billion in costs that the insurer recognized in the last quarter because of falling interest rates will come back anytime soon?

If you believe economists (and Streetwise will forgive you if you don't), the answer is not much.

Based on Manulife's sensitivity analysis, a little quick math shows the company needs rates to rise by a little more than half a percentage point to get that $1.5 billion back. Most of the increase needs to come in the U.S., which Manulife says is the biggest driver.

The consensus forecast on Bloomberg for the benchmark U.S. 10-year note's yield is 3.1% for the third quarter, rising to 3.23% in the fourth quarter. It's not until the second quarter of 2011 that the 10-year Treasury is expected to yield 3.59%, 69 basis points above where it stands now.

And given that rates have consistently hung in below where many economists have expected as mediocre economic numbers have kept the bid on bonds, there is a chance those forecasts could be on the high side.

So Manulife investors had better hope for a solid performance in stocks to ease the pressure on Manulife's variable annuity portfolio, because it could be a while before the interest rate problem goes away.

Either that, or Manulife is going to have to become more aggressive with hedging of rates.

On the equity side, the market's reaction to the volatility resulting from Manulife's decision not to hedge stock market exposure is yet again casting a lot of doubt on the company's position that it was cheaper not to hedge.

That may have been true from a simple profit and loss on the portfolios over time, but the cost to shareholders who are watching the stock sink back toward the company's IPO price in 1999 (a split-adjusted $9) is proving pretty significant.

Disclosure: None

Source: Will Manulife Get Its Money Back?