Dan Dobry
Dan Dobry

The Hunt for Yields in Fixed Income

The hunt for a yield (bonds) is getting harder than ever for fixed-income investors in recent months.

Roughly 86 percent of the $60 Trillion global bond market is traded with yields no higher than 2 percent, with more than 60 percent of the market yielding less than 1 percent. Inflation in the UK is forecasted for 2021 at 3.5% – 4% so de facto investors are losing money in real terms.

This has pushed bond investors into riskier segments of the market in search of income, compelling them to lend to lower-quality companies and countries. Junk bonds are not a reasonable substitute for near to zero returns.

Just 3 percent of the investable bond world today yields more than 5 percent, an all-time low, and represents a significant drop from levels seen roughly two decades ago.

“Yield-chasing behavior has become common,” said Matt King, of credit Citigroup. “If you are a pension fund or an insurance company, you are forced to go down in quality and take an extreme risk.”

In the late 1990s, nearly 75 percent of bonds traded with yields above 5 percent, while sub-2 percent yields comprised under 10 percent of the market.

Then the central banks responded to the 2008-09 financial crisis by slashing interest rates and launching massive bond-buying programs that fundamentally altered the investing landscape.

In the Covid-19 crisis, the Federal Reserve cut interest rates even further to near zero and pledged to buy an unlimited quantity of government debt. The central bank launched several emergency programs to shore up a range of securities — including junk bonds and municipal debt.

After the latest round of interventions, real yields on US Treasuries — which strip out expectations of consumer-price movements — have dropped to a nearly eight-year low.

The current level of interest rates and bond yields offer very limited returns in the medium term and may also offer very little protection against the risk of rising inflation.

Pension Funds Aim to Increase their exposure to alternative investments in their portfolios. In a more dramatic show of the flight from fixed income, Japan’s $1.7 trillion Government Pension Investment Fund (GPIF) slashed its weighting of US government bonds and bills to an all-time low.

The fund reported that it plans to increase the portion of alternative investments in infrastructure, real estate, credit, and private equity funds

GPIF President said, “When you’re building diversified portfolios, you’ll always have some assets which perform well and others which do poorly but it’s hard to see us getting much of a return out of cash or bonds in the near term, and clients globally are searching outside the liquid ecosystem and into real assets strategies”.

Alternative Investments play a critical role in the portfolios of tomorrow.

As allocations grow, alternative investments play an increasingly critical role in portfolios. The need for an approach that is scalable, disciplined, integrated, technology-enabled, transparent, and based on fiduciary partnerships has never been greater.

During this global slowdown and geopolitical uncertainty, the alternative assets industry remains healthy. Hungry investors are continuing to pour capital into alternatives with assets under management now exceeding tens of trillion USD.

In a survey conducted by “Preqin” last November, most alternative investors said they were satisfied with the performance of their portfolio last year. 9 out of 1o clients (87%) said their investments met or exceeded their return expectations last year and 86% of investors said they intend to commit at least the same amount of capital this year as well.

The Bottom Line

Nontraditional investors now have access to assets not correlated to the stock market, offering diversification and potentially higher returns when compared to mutual funds, stocks, and bonds.

They also are must less volatile than traditional investments the downside being that they are relatively illiquid, meaning they are difficult to sell quickly.

Some of these alternatives are complex and often have higher risks than traditional investments (especially if the investment has a component of initiation).

A wise investor will see alternative investing as a means toward diversification rather than a standalone strategy in a long-term plan.

About the Author
Dan Dobry was the founder of the Union of Financial Planners in Israel (UFPI), served as the first Chairman and President of UFPI. Dan was the Global Council Representative for Israel for the Global Community (FPSB) from 2012 - 2018 and from January 2019 is a member of the Committee for Standards and Qualifications for the European Union (SQC).
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