CREDIT

Key takeways

  • Zero-interest rate environment forces investors to identify alternative sources for income streams and return opportunities.
  • Credit markets have grown rapidly in the last decade and are now well established across all major market participants.
  • Fixed-income investors can explore compelling investments for any risk profile in a wide credit universe.
  • Professional investors, such as insurance companies or pension funds, are turning their focus to credit investments to meet their need for return generation and steady income streams and meet their liability requirements.
Concrete stairs credit investment

Credit Investments - More than just Yield

One of the key tasks of investment managers is to identify attractive sources of returns for their clients. This work has become even more challenging in today’s environment. Future market returns on stocks or bonds have been revised down, and identifying appealing and sustainable investment opportunities is even rarer.

Moreover, professional investors, such as insurance companies, pension funds and independent wealth advisors, turn the focus to credit investments not only to explore attractive risk-adjusted investment opportunities but also to meet their liability requirements.

The lowest interest rates in 100 years ask for alternative income sources. The lack of yield is well illustrated by the 10-year yield of US government bonds in the chart:

Credit Investments - More than just Yield

Source: Tradingeconomics.com, U.S. Department of the treasury; Alpinum Investment Management

Short maturity bonds

With interest rates at historic low or even negative levels and the long-term prospect of rising rates, professional investors are engaging in repositioning their fixed income portfolios for these challenging market scenarios.

Investors with a limited risk budget seeking a higher yield than cash investments find a variety of income sources and investment solutions in the credit market. For example, a portfolio of well-selected short term bonds can provide the required return profile as it keeps both the interest rate and corporate default risk at a minimum.

Tapping the depth and breadth of the Credit Universe

Investors seeking an attractive cash yield or a compelling return find a broad range of income sources and investment solutions in the wide universe of the credit market. Depending on the investors’ risk appetite and liquidity considerations, the return goal can be increased by implementing a more active investment approach, taking advantage of niche markets, diving into more complex credit asset classes, tapping the structured credit market or accepting a less liquid investment format to earn an additional illiquidity premium.

Taking up the risk perspective, a large range of parameters need to be taken into consideration. Among many others, we list below a set of main risk factors for the determination of a bond price in a given reference currency:

Credit Investment Risk Factor

Source: Alpinum Investment Management

While Central Banks used to have a primary focus on inflation targeting and have primarily influenced the short term interest rates, their scope of actions and influence has grown exponentially after the financial crisis in 2008 and got a further push with the “Covid-19” crisis. As such, the Fed did not only move to an average inflation targeting framework, but it also announced in June 2020 to buy single corporate bonds to ensure a functioning secondary corporate bond market, which is a historical move and a positive catalyst for a market that was close to collapsing in March 2020, when liquidity disappeared just in a matter of days. In the table above, we describe in the last column the Fed’s direct impact via its actions on the bond market. The column before (“Reduce impact via”) describes how an investor can insulate the main risk factors by himself.

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Concrete stairs credit investment
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