Investors chasing yield have been warned by allocators that they should not be chasing coupons at the expense of safety.
Fixed income yield-hunters and safety-seekers have travelled in completely opposite directions since the eurozone crisis began.
Safety-seekers bought Bunds, Treasuries and gilts so enthusiastically that they became largely worthless as profitable investments. Yields on ten-year Bunds have topped 2% on only four days this year (as of early November), and neither long-dated Treasuries nor gilts hit 2.5%.
For core debt holders, safety, not yield, is paramount. But Andrew Formica, chief executive of Henderson Global Investors, says: “Bunds, gilts and Treasuries are at ridiculous levels. It is not going to help anyone putting money in at these levels. Investors will wake up and regret it and say, ‘Why did I do that?’”
Sergei Strigo, Amundi’s head of emerging market debt, agrees: “It is dangerous and costly to be invested in these products. People want returns on their investments, but in a positive global growth scenario there may be inflation concerns, and with such low yields [in core debt], investors face negative real returns.”
Yet some buyers are retaining their holdings. Carmignac Gestion head of fixed income Rose Ouahba holds Treasuries for ‘usage value’ as hedges against the tail risk of America failing to tackle its debt woes. She offloaded Bunds this year, however, as they lack the US dollar’s reserve currency status.
Analysis by Robeco suggests that core sovereigns will offer little other than ‘safety value’ until at least 2016, with yields averaging just 1.25%. But Ronald Doeswijk, chief strategist, warns against ignoring them on these grounds: “From a diversification point of view government bonds still add value. If this crisis unexpectedly results in another recession in 2013, government bonds are likely one of the best investments around. Therefore, it is risky to neglect them completely.”
Meanwhile, yield-hunters stomached higher volatility and credit risk of peripheral sovereigns, junk bonds and emerging market debt, and additional sources of risk in exotic fields such as asset-backed securities.
Practitioners warn aftershocks could still come from the eurozone, even as its credit crisis is slowly reined in. Therefore, they argue, a fixed income mandate that can spread across the spectrum is advisable when hunting yield.
Chris Bullock, fixed income manager at Henderson Global Investors, says the lack of yield from debt has forced many Henderson clients to add risk further down the quality curve, depressing credit’s yield, too.
“It has been quite self-fulfilling, although there is a finite point yield can fall to. We are close to that,” he says. “There is not a strong argument as to why [yields] should move back from that.”
Given such extreme moves in different parts of the fixed income universe, Formica says the market is “very much looking for global products, which we are developing”.
Tom Douie, head of European intermediary at Neuberger Berman, says the broadening of searches beyond debt has been a multi-year process for allocators: “We have seen examples of some institutions in the private client world with near zero exposure to sovereigns, having diversified into global investment grade corporates, local emerging market debt and high yield.”
As fixed income markets have evolved over the past 15 years, people have started to look at the different and emerging categories in the asset class as ‘building blocks’ for a diversified client portfolio, Douie says. “Natural fixed income buyers recognised that to sustain a reasonable level of yield in client portfolios, they had to hold more than just investment grade fixed income. High-yield exhibits low correlation to other major asset classes, even being slightly negatively correlated to US Treasuries.”