Today, and over the foreseeable future, a series of events — call them global megatrends — will have a profound impact on the world economy. Each issue of Point of View will share insight into these trends and how the institutional investment community is preparing to address them.
Income-seeking institutional investors face a challenging global financial environment as they look to enhance the yield of their investment portfolios. Both low growth and low inflation have kept downward pressure on interest rates and, as a result, the yields on high-quality government and corporate bonds, such as the 10-year U.S. Treasury bonds. While a traditional source of yield for investors, yields on high-quality corporate and government bonds have been trending downward since the 1980s. Given recent statements by the European Central Bank and the U.S. Federal Reserve Board, the situation is expected to persist through 2012 and 2013. Against this backdrop, investors will need to look to new sources – including investment strategies and asset classes – for the potential to replace yield from traditional sources.
Interest rates on high-quality corporate and government bonds have been trending downward for years, even decades, compelling institutional investors to seek other sources of yield.
Consensus projections for interest rates, as represented by the rates on 10-year sovereign bonds, indicate investors may be dealing with a low-yield environment through the end of this year and beyond.
With interest rates on many high-quality government and corporate bonds at historical lows, adding less traditional income-generating strategies to a portfolio can help replace lost yield.
“Investors may need to consider additional sources in their search for yield. Strategies such as high-yield bonds, high-dividend equities, income/equity (such as preferred and convertible securities), emerging market debt and even hedge funds can help squeeze additional yield out of a portfolio. These strategies also carry specific risks and investors will need to fully understand the impact each would have on the overall portfolio.”
- Andrew C. Smith, CFA, CAIA
chief investment officer,
Client Solutions Group, Northern Trust