GREENWICH, Conn. (HedgeWorld.com)–A new report from Greenwich Associates Inc. analyzes the uncertain regulatory environment in Europe and the role it has played in decision-making by fixed-income investors.
The report suggests that there are two contrary trends afoot. On the one hand, new financial regulations, such as changes in pension accounting in the United Kingdom, are creating incentives for institutions to shift assets from equities into fixed income. But on the other, looming pension benefit obligations pressure institutions to increase their investment returns–a goal that appears at odds with the shift to fixed income.
Interest rates are at historic lows.
“The expected returns on core fixed-income holdings like government and investment-grade bonds fall short of the basic needs of pension funds and other institutional clients,” said Greenwich Associates consultant Andrew Awad. “As a result, European institutions are increasingly looking for alternatives with the potential for incremental returns.”
Given the contrary pressures, institutions have begun turning to complex instruments that, they hope, will improve the risk/return mix. These newly favored instruments include credit and interest-rate derivatives, collateralized debt obligations and other structured products.