Rate effect: Demand for bonds grows

Ahead of the Federal Reserve decision to raise interest rates, a majority of institutional investors indicate that they will raise exposure to investment grade bonds, research conducted by NN Investment Partners (NN IP) revealed.

The survey, conducted among more than 100 institutional investors throughout September revealed that nearly two in five (39%) of respondents believed institutional investors will increase exposure versus just 16% who believe it will be reduced.

According to NN IP, the most common reason cited for this was the desire for security and income (31%). One in four (26%) said it was because of the need to match liabilities while 22% said they expect market conditions to deteriorate and they provide a safe haven; another 17% said IG bonds generally have benefitted from enhanced liquidity.

Sylvain de Ruijter, head of Global Fixed Income at NN Investment Partners, commented: “The anticipated rate rise in the US will be key for bond markets but our research shows that despite the low yield environment, the income from investment grade credit, as well as high yield credit, has again become attractive in the last few months, assuming the Western developed markets can avoid a sharp slowdown.”

Alongside rising interest rates, investors also anticipated a gradual pickup of inflation. On average, respondents in the survey estimated that in three years’ time, inflation in the US will be 3.3%, 2.5% in the Eurozone and 3.0% in the UK. They said the US is currently at a recovery stage in its credit cycle (44%) while the EU and Japan were judged to be in a state of repair (63% and 51% respectively) and Emerging markets are in a downturn (44%).

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