mast image

Special Report

ESG: The metrics jigsaw

Sections

Negative rates confound pension fund ‘prudent’ asset allocation, says S&P

Related Asset Managers

Negative interest rates set by central banks run the risk of making prudent asset allocation “impossible” for pension funds and other long term investors that relay on bonds for part of their portfolio, according to S&P Global.

David Blitzer, managing director, index management, at S&P Dow Jones Indices, said a negative policy rate by a central bank will spread negative interest rates across the economy, which could lower bank profits but also hurt other financial institutions.

“Insurance companies and other non-bank financial institutions facing long term liabilities at fixed nominal rates will suffer,” he wrote in a contribution to an S&P report on the range of impacts of negative interest rates. “Pension funds and other long term investors which rely on bonds for part of their portfolio will find prudent asset allocation impossible.”

Overall, if negative interest rates spread beyond major financial institutions, society would return to being “cash-only”, said Blitzer.

“If nothing else, it’s a cost in productivity. It gets more difficult and expensive to complete transactions. You really turn the clock back.”

Robert Palombi, managing director at S&P Global, noted that negative rates can incentivise pension funds or insurance companies to increase their investment risk profile, which in turn can enable riskier borrowing by companies, fuelling a negative feedback loop.

“Negative interest rates lead to excessive risk-taking, which could create more credit pressures and possibly defaults that have a deleterious impact on the economy, and creates the need for more stimulus,” he said.

However, he said such a scenario can be avoided if the negative rates policy is successful in stimulating economic growth.

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2575

    Asset class: Core Real Estate Muli-Manager Separate Managed Account.
    Asset region: Global.
    Size: CHF 150m.
    Closing date: 2019-12-20.

  • QN-2576

    Asset class: Small Caps Equity.
    Asset region: US.
    Size: $>100m.
    Closing date: 2019-12-09.

  • QN-2578

    Asset class: Sovereign Local Currency Emerging Market Debt.
    Asset region: Local emerging markets.
    Size: EUR 950m.
    Closing date: 2019-12-19.

Begin Your Search Here
<