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  1. Getting real about rates

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Getting real about rates

The post-war era of substantially positive real interest rates may be gone for good

 

J.P. MORGAN STRATEGIC INVESTMENT ADVISORY GROUP

Authors: John Bilton, Michael Buchenholz, Michael Cembalest, Kyongsoo Noh,
Andrew Norelli, Paul Quinsee, Pulkit Sharma, Mark Snyder, Karen Ward 

Contributors: Jo Akehurst, Berkeley Brown, Aidan Bush, Katya Chagaeva,
Jason DeSena, Jakub Kolodziej, Dave Laughlin, Richard Morillo, Katherine Roy, Valerie Stephan,
Rick Wei, Allison Wiggins, Ritchie Zhang

Despite our expectations for a sustained strong economic recovery, low or negative real interest rates look set to persist for an extended period of time. At its core, our thesis is based on the expectation that central banks will be unable to shrink their balance sheets meaningfully for fear of political reprisal or a financial shock. For investors, recognizing and planning for prolonged financial repression is key.

READ FULL REPORT  HEAR FROM OUR EXPERTS

Why will real rates remain low for years?

PJCT-0721-AM-623892-strategic-advisory-summary-700x700-03-hr

There are two reasons we could find ourselves stuck in a low or negative real rate environment:

  1. A weak post-pandemic recovery

  2. 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
PJCT-0721-AM-623892-strategic-advisory-summary-700x700-05-hr

What does this mean for Pensions and Insurers?

PJCT-0721-AM-623892-strategic-advisory-summary-700x700-04-hr

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

Helping clients build stronger portfolios

Learn more about the strategic investment advisory group

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