Why will real rates remain low for years?
There are two reasons we could find ourselves stuck in a low or negative real rate environment:
- A weak post-pandemic recovery
- An extended period of financial repression
How should investors respond?
The bond vigilantes are now outgunned by the bond pacifists, and the real opportunities lie outside of traditional fixed income.
- Securitized credit: commonly offers amortizing cash flows, and relatively short maturities
- Equities: US and Europe can contribute meaningfully to returns
- Real assets: provides stable real yields with potential for cash flow growth during inflationary periods
What does this mean for Pensions and Insurers?
Significant segments of the global institutional industry are particularly sensitive to low-interest rates, but there are strategies for coping with a low-rate environment.
- Corporate Pensions adopt income-oriented assets, seek credit diversification and increase illiquid assets exposure
- Public Pensions: look for alternative income and illiquidity to boost returns
- Insurance Providers: replace some long duration fixed income and public equity by illiquid alternatives