Back to boring
During the phase of zero or negative interest rates, many institutional investors revised their investment guidelines. The aim was to be allowed to use risk assets with higher yields in addition to interest-bearing securities. “Now there is a big movement ‘back to boring’, i.e. into the credit business, which is considered boring,” says Sebastian Bergmann, Managing Director of EDS European Debt Solutions GmbH. “At the same time, loans in the public sector are an even slightly higher-yielding alternative at the same security level.”
As was the case 15 years ago, long-term interest rates are currently between three and four per cent again. “This is a feel-good scenario for many institutional investors,” says Bergmann. “Foundations just like pension funds often seem happy to be able to reduce equity quotas again and take risk out of portfolios.”
Traditionally, the investment guidelines of these institutions have been very conservative. “This has meant that with the long slide in interest rates, the current returns on new investments have been lower and lower,” says Bergmann. “Few have taken advantage of the high rates that came with low interest rates to sell.” Conservative institutions in particular often rely on holding bonds to maturity to avoid taking on market risk.
But the past few years have also provided a new look at the risks of government bonds. “The price fluctuations were enormous even for Bunds,” says Bergmann. And they showed that even safe investments are not suitable in every market phase. “Over time, many institutional investors have seen the average coupon in their bond holdings fall further and further,” Bergmann said. “This will continue to shape the work for some years to come, even if interest rates are currently rising again.”
Short maturities are advantageous in phases of changing interest rates. “The risk remains manageable, which stabilises the portfolios,” says Bergmann. In addition to short-dated government bonds, loans in the public sector and those for services of general interest, which include public infrastructure, are particularly suitable. “The default rates for municipalities are practically zero, yet they yield higher than German government securities,” says Bergmann. The reason lies in the relative illiquidity of these loans. “A premium is also paid because of the theoretically higher complexity,” says Bergmann. “Admittedly, no German municipality has yet failed to meet its obligations.” But should it come to that, repayment would take a little longer because of the diversions via the state and federal government.
“However, this is currently not to be expected, which is why loans to the public sector are a very good way for institutional investors to invest funds,” says Bergmann. “Especially if they are securitised cash loans that are refinanced at short intervals and thus always reflect the current level of interest rates.”