U.S. investors have stopped worrying that inflation will pick up, Invesco reported Monday in releasing its first global fixed income study.
Now, a majority of investors look forward to moderate growth with little risk of inflation.
“This consensus tells us why yields are so low,” Invesco’s chief macro strategist Rob Waldner said in a statement. “The big risk for investors is that they are underestimating inflation risk in a strong global economy.”
Invesco’s study, conducted by NMG, involved face-to-face interviews with 79 global fixed income specialists, mainly heads of fixed income, chief investment officers and heads of investment strategy.
Three in five fixed income interviewees considered the global economy on the path to recovery, but did not foresee the typical post-slump normalization: recovery, interest rates and inflation. Instead, they expected a “new normalization,” characterized by continued relatively low yields, low inflation and central bank support.
The study also found a strong appetite among global investors for alternative credit, such as bank loans and real estate debt, which they saw as offering increased alpha, generating higher income returns and providing increased diversification.
Investors in the study on average allocated 20% of their portfolios to alternative credit, but among North Americans, the allocation was 26%. The study identified several reasons for this:
- Many alternative credit markets and opportunities are located in North America
- Regulatory burdens there are lower, especially for insurers and pension funds, than in Europe and Asia/Pacific
- More emphasis is placed on achieving higher returns as a way to close defined-benefit pension fund deficits
- There is a stronger belief in the region that certain alternative credit exposures aid portfolio risk reduction, and particularly diversification
“The range of sub-asset classes within fixed income has grown significantly over recent decades and now spans a broad range of diverse investments to include bank loans and real estate,” Waldner said.
“While traditional core fixed income assets continue to play a foundational role in many fixed income portfolios, alternative credit is expected to increase in institutional fixed income investors’ portfolios.”
According to the study, environmental, social and governance principles are rapidly extending beyond equity, where they are now embedded, to fixed income, with pension funds driving this trend.
Still at an early stage, ESG implementation in fixed income is currently focused on corporate bonds. Some governments encouraging investment in green bonds and social infrastructure projects by making higher yields available relative to comparable sovereign bonds.
In another finding, Invesco said pension funds with large funding deficits were looking for tailored solutions, especially around liability matching. “Active management is still important to U.S. fixed income investors,” Waldner said.