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An insurer’s guide to fixed income: Setting the record straight on rates and credit

Amar Reganti, Investment Director
2021-11-01
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.

This spring, investors experienced one of the most volatile periods in modern market history. The speed with which financial markets sold off in March, and then rallied following unprecedented steps by the US Federal Reserve (Fed) and the US Treasury, shook even seasoned market participants. There has been active intervention in nearly every major fixed income sector. As of this writing, we face 10-year Treasury yields at historic lows (again) and mounting uncertainty about how insurers should be investing in fixed income markets in order to pursue their investment objectives.

Low yields and tight credit spreads pose quite the challenge for insurers who are beholden to fixed income investments. And, with economic and public-health uncertainty likely to be the norm for the foreseeable future, it’s safe to say that markets will remain volatile. In this environment, we would argue that insurers need to think even harder about how fixed income can best meet the needs of their business.

Furthermore, we find that record-low interest rates and recent spread behavior have increasingly led to misconceptions about the ability of fixed income to perform its traditional roles in investor portfolios. That, in turn, is holding many investors back from using fixed income as effectively as they otherwise could. Here we: 1) address common misconceptions around rates and credit; and 2) propose portfolio implementation ideas to potentially make fixed income work harder for clients going forward.

Potential market and investment implications

Investor allocations to interest-rate-sensitive products tend to be bounded by two core beliefs, neither of which is necessarily accurate:

  1. Interest rates are simply too low at current levels and, at some point, will have to go up from here.
  2. As long as rates are this low, duration will be a less effective counterbalance to credit and equity risk.

These beliefs are rooted in long-held assumptions that are only now finally being shaken loose, with important implications for investing in fixed income. Many investors’ thinking about fixed income has been (and remains) shaped by…

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Authored by
reganti-amar-316x316
Amar Reganti
Investment Director
Boston

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