Institutionals: rapid interest rate steps as a problem
Kleinmachnow, 21 September 2022 – The central banks’ actions with surprisingly large interest rate steps are causing many institutional investors’ plans to fall apart, and the uncertainty on the markets is causing shifts in the portfolio. “We are currently seeing asset allocation being positioned to be less risky at a rapid pace,” says Sebastian Bergmann, managing director at EDS. “Demand for safer assets such as loans to municipalities is increasing.”
In view of the uncertainties about the further development of the economy, investment decisions are being put to the test. “Investment committees or investment committees are currently looking to significantly reduce risk,” says Bergmann. “On the one hand, the chosen investment strategy is being fundamentally questioned.” On the other hand, however, many institutional investors are also looking to create liquid funds and put them in a good parking position in order to be able to act quickly when planning uncertainties recede.
“The lowest possible volatility, little market risk and short-term availability are the criteria they look for,” says Bergmann. Time deposits are still a losing proposition for many institutional investors, as banks are very slow to pass on the end of negative interest rates to the market. Corporate bonds or even loans to companies are currently showing rising risk assessments. “In view of a possible recession, the market risks of corporate securities are too high to serve as a parking position for liquidity,” says Bergmann. After all, there could well be a significant increase in insolvencies.
The state, on the other hand, cannot go bankrupt, which is why its papers are always popular for low-risk bridging. “Short-dated bonds are particularly sought after here,” says Bergmann. “The yields are kept within limits, but there is greater volatility because of the sharp rise in interest rates.” In addition, many institutional investors still have long-dated Bunds in their portfolios. “Here, significant markdowns have to be accepted in view of the already increased interest rates.”
The situation is different with municipal loans. “Here, there is almost no volatility when it comes to short, repeatedly prolonged cash loans,” says Bergmann. “The return on this is more attractive than, for example, on term money with the same maturity.” Private debt funds that focus on these assets therefore currently offer very good opportunities as a place to park money. “But not just for parking, such funds as EDS Kommunalis+ are also interesting in the long term,” says Bergmann. “After all, because of their short maturities, they behave almost like a floater and thus compensate well for increases in interest rates or jumps in inflation.”