Long-duration fixed income still in demand as U.S. yield curve inverts

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Dollar sign on one hand and alarm clock on another hand © Tsung-Lin Wu / 123RF Stock Photos With turbulent equity markets, fixed income has a major role to play as defined benefit pensions look to more closely match their liabilities and investments, says Steve Peacher, president of Sun Life Investment Management.

“The big mismatch over time has been a duration and curve mismatch,” he says. “People have had long liabilities. They haven’t focused as much on fixed income and so they’ve had this big interest mismatch, which has been a killer as interest rates have come down over 30 years.”

While pension plans use shorter-duration, high-yield bonds to boost their fixed income returns, Peacher says he’s seen a high demand for longer-duration, often investment-grade fixed income, which still provides some yield but better matches interest rate exposure for pension assets and liabilities.

“There’s a lot of demand for long credit portfolios, so people who want to extend duration and try not to give up too much yield,” he adds.

The trend comes as the long-watched U.S. yield curve actually inverted at the end of last week, which apart from being a generally gloomy financial indicator, is causing a lot of angst among fixed income investors, says Peacher.

“There are two challenges and concerns on everybody’s mind. Rates were starting to go up and then they’ve now come back down. That’s symptomatic of a lot of the concerns about global growth and declining rates, [which] hurts everybody, because returns have gone down. Another general concern out there is about the credit cycle. It’s been now 10 years since the end of the financial crisis and credit has done well for the last 10 years. It’s not going to do well forever.”

The yield-curve inversion doesn’t spell disaster, he notes, though it adds to the somewhat frustrating environment that fixed income investors are currently working in. “I don’t know if any of that has changed in the last the week, except that people have seen a downtick in yields, which isn’t massive, but it’s not encouraging.”

This article originally appeared on CIR’s companion site, Benefitscanada.com. Read the full story here.

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