Institutional investors expect ‘lower forever’ bond yields

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No matter what the central banks decide in future, institutional investors are convinced bond yields will remain at a very low level.

At the Institutional Retirement and Investor Summit in Vienna last week, asset owners and asset managers voiced their belief that bond yields were unlikely ever to return to old levels.

“The ‘low for longer’ scenario will remain, and this is not only down to the national banks but because of technological reasons,” said Walter Jachs, head of portfolio management for the pension reserve fund of the European Patent Office in Munich.

Even an interest rate increase by the US Federal Reserve would not change this outlook, he said. Yesterday the Fed raised its main interest rate for the third time in seven months, to 1.25%.

Some analysts have pointed out that, over the past few years, the bond market landscape had not only been changed by quantitative easing (QE), but also by the economy itself. Companies from the technology sector such as Apple and Google have become more influential and have to pay very low interest on their bonds.

At the same time, industrial sectors take up a smaller share of the economy and are deemed more at risk of default as they have to pay higher interest on their bonds.

To prepare for this scenario, Jachs said he was seeking to “diversify into as many liquid asset classes as possible” via active management. “We need liquidity for rebalancing, arbitrage and opportunistic investments because too many unforeseen things can happen,” he said.

Despite the ‘lower for much longer’ outlook, institutional investors need to prepare for future rate hikes, said Peter Becker, managing director at Wellington Management.

“The low returns we have leave no buffer to protect from [QE] tapering, and it is clear that federal banks will want to get out of the current situation sooner or later,” Backer said.

He added: “Short duration credit should still be going well even if there is limited potential for further narrowing of the spreads.”

However, Bernhard Goliasch, head of asset management at the Signal Iduna Group, had a more relaxed view on markets: “Currently we have a period of relative calm compared, for example, to 2001 to 2003 when we lost 90% with equities.”

Signal Iduna, which incorporates insurers and other financial service providers, has “a higher equity quota” than other German insurers, Goliasch said.

“Part of the equity investments offer stable dividend income which can be seen as the ‘new coupon’,” he added.

He added: “Investors have to decide whether they accept worse, more illiquid credit investments or rather go into equities.” 

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