Jim Cielinski

‘Soft landings’ are hard to achieve but evidence is building that the US Federal Reserve might be able to pull off this feat. While risks remain, credit markets are offering an attractive proposition, according to the latest analysis from Janus Henderson Investors.

Declining inflation and expectations of rate cuts is allowing yields to come down and companies are finding it easier to refinance in capital markets. This is despite bank lending standards remaining tight historically.

Rather than being catalysed by a major macroeconomic or geopolitical event, there have been rolling earnings recessions across a number of different industries, but earnings forecasts suggest companies may be through the worst phase.

Against this macroeconomic backdrop, the “Access to Capital Markets” and “Cashflow and Earnings” indicators have moved from red to amber over the last quarter.

Janus Henderson Investors’ latest Credit Risk Monitor tracks corporate fundamental and macroeconomic indicators on a traffic light system to indicate where we are in the credit cycle and how to position portfolios accordingly.

Jim Cielinski, Global Head of Fixed Income at Janus Henderson Investors, said: “People often ask us what signposts we are looking at. For us, the key one remains inflation. Rate cuts are predicated on a fall in inflation. If that persists, it will allow central banks to ease aggressively, which will stand us in good stead”.

“We think that spreads will tighten in the coming months. The soft landing, the friendlier central banks stance – all this tends to be supportive of that. We don’t expect heroics from the corporate bond segment, but we think they can do better than just the coupon or carry that they provide.”

Debt loads and servicing

Mild weakening in credit fundamentals

Most companies are able to service their debt, but some clearly cannot which is why we are seeing the default rate tick up across both European and US High Yield. The deterioration in credit ratios is mild, however, and default rates are likely to peak at relatively low levels, with a slightly higher default rate in the US given it has a lower quality High Yield market than Europe. Distress is concentrated in the real estate, telecoms, media, and pharma sectors. Shifting work habits, debt loads, and higher financing costs explain the problems in real estate, whereas the media sector has been struggling from weakness in cable operators and a general softening in advertising, although a busy election year in 2024 could prove supportive for advertising spend.

Access to capital markets

Credit conditions have eased even as bank lending standards remain tight

The decline in yields late in 2023 saw a lot of issuance, both by sovereigns and corporates, which was easily absorbed by markets eager to lock in yields. In the corporate sector this enthusiasm has continued into 2024 and has contributed to the spread tightening we have seen in recent weeks. We expect central banks to start cutting rates this year, which will help reduce financing costs, but it pays to be discriminatory. Any evidence of economic downturn in the US could see spreads widen. Bank lending standards remain tight but during this credit cycle the impact seems to have been diluted by the ready availability of financing via private credit.

Cashflow and earnings

Economic data suggests a rare ‘soft landing’ might be achievable

Disinflation globally, better-than-expected US economic data and the bottoming of PMIs in Europe have lent credence to the thesis that central bankers can rein in inflation without excessive damage to the economy. The earnings growth outlook appears to have stabilised overall, with the exceptions of the UK and China. We retain some concerns that the lagged impact of earlier rate rises could still weigh on the economy, but resilient consumer and labour markets should provide support to corporate earnings.

Asset allocation implications

Lower inflation has historically been associated with uncorrelated assets, whereby when risk assets struggle, bonds outperform. This important diversifying dynamic has been missing in recent years which led to a poor outcome for many diversified investors. As inflation reverts to normal, that diversification should return, making bonds a more attractive proposition.

Both Investment Grade and High Yield are attractive. Investment Grade credit is more sensitive to duration and has a higher credit quality. It should benefit from falling rates while offering more protection in different economic scenarios. In a ‘soft landing’ scenario High Yield should perform well. Individual security/sector selection will continue to play an important part in delivering attractive risk-adjusted returns in credit portfolios.

Jim Cielinski, Global Head of Fixed Income, added: “With US consumption holding up strongly, and the US labour market remaining tight, there is no urgency for the Fed to cut rates. That said, US policy rates are above inflation, meaning that rates do not need to be as restrictive, and the Fed has already signalled a pivot in policy rates.

“We are slightly overweight credit and see further spread tightening as likely if the consensus ‘soft landing’ narrative holds. However, the jury is still out on whether we have turned the corner in terms of credit fundamentals. Given that the ‘soft landing’ narrative could shift to a hard bump down to earth, we believe it prudent to maintain a focus on quality companies with resilient cash flows.”

The post A soft landing and friendlier central bank stance bode well for credit markets appeared first on AdviserVoice.

Jim Cielinski

The signposts for a turn in the credit cycle remain in place, just as they have for the last year, with high interest rates and high debt loads contributing to the downward trajectory, according to the latest analysis from Janus Henderson Investors.

Although the impact will be lagged, the staggering rise in interest rates is expected to have a domino effect on the current credit cycle: refinancing debt loads at higher rates can lead to decreased interest coverage ratios and ultimately more defaults in the years ahead.

Janus Henderson Investors’ latest Credit Risk Monitor tracks corporate fundamental and macroeconomic indicators on a traffic light system to indicate where we are in the credit cycle and how to position portfolios accordingly. The key indicators tracked (‘Cashflow and Earnings’, ‘Debt Loads and Servicing’, and ‘Access to Capital Markets’) all remain red for the fourth quarter in a row.

Jim Cielinski, Global Head of Fixed Income at Janus Henderson Investors, said: “The credit cycle tends to turn only if three conditions are present: high debt loads, lack of access to capital, and an exogenous shock to cash flow. These conditions – which are the three indicators in our Credit Risk Monitor – are all present today: the yield curve is inverted, lending standards are tightening, and central bank policy globally has been aggressively moving tighter. Each cycle is different, but a combination of high debt levels and a higher for longer interest rate environment is putting pressure on companies to service that debt while cutting off access to capital at a reasonable price. In such an environment, active security selection is critical.”

Debt loads and servicing

Interest coverage ratios under pressure

A lot of companies have a lot of debt to refinance. Higher rates will force interest coverage ratios to deteriorate precipitously in the coming years and lead to an escalation of defaults. This will, in turn, further tighten lending standards, restricting access to affordable capital. However, the result will be lagged. The maturity wall for most companies will not hit for another 12 to 18 months. This delay might protect the corporate market in the short term, but valuations offer little reward for absorbing high recession risk at current levels.​

Access to capital markets

Mixed picture for companies of all sizes

The more robust, large-cap companies can, and will continue to, refinance with relative ease, although the rise in borrowing costs is set to be felt more heavily in the coming quarters.

However, small and medium enterprises – which typically rely more heavily on the banking system for financing – will continue to struggle to borrow, and defaults in this space will be more pronounced. The price of capital, in both nominal and real terms, presents another challenge. The real cost of borrowing is higher than it has been for almost a decade. This will have a significant impact on companies, particularly if revenues slow down.​

Cashflow and earnings

Reasons for previous optimism are fading

Higher inflation has not been negative for most companies. High nominal growth has lifted revenues for corporations and benefitted those which had previously locked in lower borrowing rates. Higher rates are likely to start crimping consumption and, in turn, earnings. The resiliency of the consumer has been underestimated, but the headwinds are growing.

Inflation is now falling and will be supportive of a pause for central banks. But if supply-led deflation turns into demand-led deflation, nominal growth will be dramatically slower and borrowing costs could considerably outpace revenue growth.​

Asset allocation implications

Careful selection remains key. Corporate spreads, or the relationship between government and non-government bonds, do not appear to fully reflect the risks in the global economy. The current attractive levels of yield should become increasingly compelling to long-term investors and start to produce strong total returns. Relative returns of risky assets, however, may suffer when compared to quality segments of the market. Defensive sectors in the bond market, such as investment grade credit, should begin to not only offer attractive total returns, but also robust diversification benefits.

Jim Cielinski, Global Head of Fixed Income, added: “This is a time in the cycle to focus on the difference between total returns and excess returns. Interest rates have skyrocketed, producing some of the highest levels of yield in more than a decade. Only 18 months ago, central banks were indiscriminate buyers of bonds, but have now become price-insensitive sellers. Budget deficits are ballooning, hitting 7% of GDP in the US. The supply-demand rebalance is catching investors off guard as they view these fiscal trends as unsustainable. Bond investors are demanding additional compensation.”

The post Higher for longer interest rate environment will have domino effect on corporate defaults appeared first on AdviserVoice.

Jim Cielinski

The quality of corporate credit issuance is weaker than the market is currently pricing in, according to the latest analysis from Janus Henderson Investors. Quarter-on -quarter metrics show a broad, albeit shallow deterioration, suggesting defaults could pick up in the second half of the year, even if the pace of defaults is slower than in previous cycles.

A seasonal lull in primary issuance could support markets near term but the research suggests that tighter lending standards, higher refinancing costs and a slowing economy will gradually take their toll on credit quality.

Janus Henderson Investors’ latest Credit Risk Monitor tracks corporate fundamental and macroeconomic indicators on a traffic light system to indicate where we are in the credit cycle and how to position portfolios accordingly. The key indicators tracked (‘Cashflow and Earnings’, ‘Debt Loads and Servicing’, and ‘Access to Capital Markets’) all remain red for the fourth quarter in a row.​

​Jim Cielinski, Global Head of Fixed Income at Janus Henderson Investors, said: “There was something for everyone in the last quarter. Bears could point to weakness in lead economic indicators, stubborn core inflation and credit metrics deteriorating; Bulls could counter with strong labour markets, declining headline inflation and a robust consumer. As recession fears scaled back, markets have been pricing in a more muted credit default cycle. Our view is more circumspect, as we expect more “trouble credits” to emerge as the lagged impact of tighter policy takes effect. That said, the timeline could be protracted, given many companies will not refinance for the next one to four years, on average.”

Debt loads and servicing

Debt loads will remain high

A combination of high inflation and robust nominal growth has largely protected corporate credit quality as nominal earnings have held up. As such, highly indebted companies have been largely insulated from the pain that would normally be associated with this stage in the credit cycle. However, those with a high stock of debt may be toppled by the combination of higher financing costs in a slower growth environment.

Access to capital markets

Lending standards continue to tighten across the board

The new environment of falling demand, declining inflation, slower growth but elevated real rates will cause lending standards to tighten, and capital availability for higher leveraged companies will be stretched. Further liquidity withdrawal amid Quantitative Tightening will also impact access to capital.

Cashflow and earnings

Prices and volumes are weakening

Over the previous quarter, tighter financial conditions alongside weak manufacturing PMIs contributed to earnings downgrades for some industrials. Recent bankruptcy filings for some small businesses are also likely to spread more broadly into capital markets.

The broader slowdown in consumer demand as a result of higher rates filtering into the economy will hit company earnings and expose the bottom 10-15% of highly indebted corporates which have so far managed to remain afloat. As earnings growth weakens, this could create an exogenous shock to cash flow for come companies.

Asset allocation implications

High yields across the credit spectrum will not last forever

Nimbleness and careful credit selection remains key. All-in yields look attractive across the credit spectrum today, relative to history, because policy rates have moved up. However, investors need to consider the extent of the upside available in higher yield issuances given considerations around default risk and liquidity concerns.

Spreads have tightened further, particularly in the higher yielding segments. Unless a soft landing materialises, yields on some sub-investment grade bonds may not offer a sufficient cushion for slowly rising default risk and liquidity declines.

Attractive yields are available in some of the safer areas of the market, such as short duration, high quality assets. However, investors might want to favour a cautious stance on highly leveraged companies with significant exposure to floating rate debt amid a higher-for-longer interest rate scenario.

Jim Cielinski added: “Seasonal technicals may support credit markets near term but we anticipate credit quality dispersion to become more material later in the year as companies address the 2025 maturity wall. A selective, nimble investment approach is paramount.”

The post Credit quality weaker than market realises – with defaults likely to pick up in second half of the year appeared first on AdviserVoice.

Seth Meyer

Janus Henderson has announced several promotions in its Fixed Income platform, effective 1 October 2022, that will further enhance its client-focussed business.

Seth Meyer, currently a Credit Portfolio Manager at the firm, has been promoted to Head of Fixed Income Strategy, a newly created role. In his new role, Seth will work with Jim Cielinski, Global Head of Fixed Income on facilitating the strategic and commercial direction of the Fixed Income platform. Furthermore, Seth will have responsibility for leading the Fixed Income Client Portfolio Management team and implementing the ESG strategy within the Fixed Income franchise. Seth brings 24 years of financial industry experience spanning a variety of investment and client focused roles, including portfolio management, credit research, product management and consultant relations. Seth will retain Portfolio Manager responsibilities and report into Jim.

Janus Henderson is also appointing Tom Ross to lead its High Yield franchise and John Lloyd to lead its Multi-Sector Credit franchise. These appointments will allow the firm to continue to help clients meet their diverse needs by more closely aligning the strategies within these businesses, creating a more global and truly cohesive approach across two of its most successful franchises.

In his newly created role, Tom Ross will be responsible for leading investment strategy and portfolio management in the High Yield franchise. In his role, John will be responsible for creating the strategic framework, leading investment strategy, launching new products and bringing together ideas globally across the Multi-Sector Credit franchise. Tom and John will ensure portfolios leverage the full depth and breadth of the firm’s global expertise seeking to drive the best outcomes for its clients in adherence with its disciplined, repeatable investment process. They will retain their portfolio manager responsibilities but additionally, will be empowered to seek growth opportunities for these business lines. Tom Ross, a Corporate Credit Portfolio Manager at Janus Henderson brings 20 years of active management industry experience and John Lloyd, former Co-Head of Credit Research, brings 24 years of financial industry experience.

Mike Talaga has been promoted to Head of Credit Research, North America, replacing John Lloyd. Mike will be responsible for overseeing the corporate credit research effort. Mike brings 20 years’ financial industry experience and has been a credit analyst with the firm since 2015. During this time, he served as an industry expert within his coverage area and generated alpha for the U.S. and global Fixed Income portfolios through his individual security recommendations. Mike will work very closely with Andrew Griffiths, Head of Credit Research, EMEA continuing the close working relationship that Andrew had with John Lloyd. A trademark of the firm’s Fixed Income platform is the global collaboration which allows for fluid idea sharing.

Jim Cielinski, Global Head of Fixed Income at Janus Henderson Investors, said:  “We pride ourselves on the truly global nature of our Fixed Income platform and the collaboration across our teams of investment professionals. The promotions we are announcing today further reinforce our culture of collaboration and innovation and better position us to develop new client solutions in these key franchises to help meet the evolving needs of our clients”.

Last month the firm announced that it had expanded its Fixed Income franchise with the hiring of a four-person Emerging Market Debt team filling a key product gap to better enable the firm to meet the needs of its clients for standalone emerging market debt strategies, as well as enhancing its overall global fixed income franchise and ability to build multi-sector fixed income solutions.

The post Janus Henderson enhances Fixed Income business with internal appointments appeared first on AdviserVoice.

The team comprises long-standing and well-respected portfolio managers Bent Elvin Lystbaek, Jacob Ellinge Nielsen, Thomas Haugaard, and Sorin Pirău. The team joins from Danske Bank Asset Management, where they managed EUR 6 billion in hard currency EMD pooled vehicles and segregated accounts for both institutional and retail clients. They will join Janus Henderson by 1st September 2022 and report to Jim Cielinski, Global Head of Fixed Income. The team will be based in Copenhagen, Denmark, further expanding the firm’s northern European footprint.

Mr. Cielinski says the EMD team acquisition emphasises Janus Henderson’s focus on meeting clients’ needs for standalone emerging market debt strategies and enhancing Janus Henderson’s overall global fixed income franchise and ability to build multi-sector fixed income solutions.

“Emerging markets debt is a fast-growing segment of the market that many investors look to for higher income and risk-adjusted returns. We believe this is a critical component of a global fixed income platform that supports single-strategy and multi-sector portfolios.”

“Adding this EMD hard currency capability to Janus Henderson’s global fixed income platform complements our existing strengths in Emerging Market corporate credit, global bonds, and Emerging Market equities. We are excited to welcome our new colleagues Bent, Jacob, Thomas, and Sorin to Janus Henderson and look forward to generating risk-adjusted returns for our clients,” Mr. Cielinski said.

The EMD team’s investment process has consistently delivered for clients since its inception in 2013. It seeks to generate alpha through country allocation and security selection, focusing on credit risk premia. The team integrates environmental, social, and governance factors into the research process and considers quantitative and qualitative factors to determine an internal, forward-looking score.

Ali Dibadj, Chief Executive Officer at Janus Henderson, commented: “Hiring a world-class EMD team demonstrates our commitment to responding to our clients’ needs and supporting the growth of our firm. We will continue to look for organic and inorganic ways to do this.”

The post Janus Henderson expands Fixed Income franchise with the hiring of Emerging Market Debt team appeared first on AdviserVoice.

“Jim brings a wealth of experience managing fixed income investment teams and I am excited to work alongside such an accomplished investment professional,” said Enrique Chang, Janus Henderson Global Chief Investment Officer.

“The addition of Jim is a testament to Janus Henderson’s ability to attract a strong team of global investment professionals committed to delivering superior risk-adjusted returns for clients.”

Jim brings more than 30 years of investment management experience to the firm. He was most recently Global Head of Fixed Income for Columbia Threadneedle Investments, where he oversaw fixed income globally, including more than 165 investment professionals and $190 billion in fixed income assets under management.

Prior to joining Columbia Threadneedle in 2010, Jim spent 12 years at Goldman Sachs Asset Management as Managing Director and Head of Credit, where he managed the credit exposures across all investment grade portfolios and across more than $200 billion in Core, Core Plus and hedge fund assets. Previously, he was head of Fixed Income for the Utah Retirement Systems, Assistant Manager of Taxable Fixed Income for Brown Brothers Harriman & Co, and Equity Portfolio Manager for First Security Investment Management.

The post Janus Henderson Investors appoints Jim Cielinski as Global Head of Fixed Income appeared first on AdviserVoice.

Today, ultra-low, or negative interest rates have become the norm in many developed markets. More than $12 trillion of bonds yielded less than zero at the beginning of September 2016. The journey has produced stunning returns, as lower rates have propelled bond prices higher. But like so many journeys, the destination – characterised by low rates, slow growth and paltry potential returns – is a much less inviting place. Market participants are witnessing their historical framework upended and losers will greatly outnumber the winners as the positive effects of low rates fade.

Sovereign bond returns, both in nominal and real terms, will be lower. Indeed, investors in negative yielding bonds are virtually guaranteed a negative nominal return on securities held to maturity. Also troubling for investors are the reasons for today’s low yields. Markets have largely given up on a rebound in growth, instead pricing in a prolonged period of weak productivity and unexciting prospects. And although we find bonds to be overvalued, the “lower for longer” argument remains deep-rooted and may not be reversed for some time. If low rates are a persistent feature, just who are the biggest losers? The groups most harmed by today’s unprecedented policies include the following:

1. Savers, as both lower income returns and the slower pace of compounding will sharply reduce future returns.
2. Life insurance companies, as many have made return promises in excess of market yields.
3. Pension plans, as lower discount rates are forcing funding gaps to balloon.
4. Investors seeking portfolio diversification, due to the dissipating potential of bonds to provide effective diversification as yields approach a zero percent lower bound.
5. Policymakers, as rates have approached levels that reduce the effectiveness of traditional monetary policy tools.

Savers face a new reality

Although falling yields can produce robust returns from bonds, permanently lower yields do not. Too often, this is viewed only in a short-term context. An important corollary to ultra-low returns, however, is that the magic of compounding disappears. Savers are underappreciating the impact of replacing the “miracle of compounding” with the “curse of compounding”. They are making faulty assumptions that returns will normalise, allowing a repeat of the 6-8% returns of yesteryear. They further fail to recognise that a persistent low return environment hinders not only annual returns but destroys the cumulative effect of savings. For those that put aside $25,000 and earn a return of 8% per year, the value of those savings will grow to $79,300 in 15 years, assuming returns are reinvested. But that same $25,000 earning only 3.5% per annum grows to only $41,800 in the same period. And for those investors sticking to the safety of short-dated bonds, returns will be <1.0% in most sectors. The nest egg in 15 years will have grown to only about $28,000, and it would take more than a century for assets to double!

The curse of compounding: Low rates will undermine the virtues of saving

Growth in the value of £100 under different rates of return

Return expectations have not adjusted to this new reality. Investment frameworks still reflect a belief that returns will revert to long-term averages. This is inconsistent with starting valuations, the level of potential GDP growth and productivity, and the already sky-high profit share of GDP. Investment returns are likely to be materially lower in the next two decades.

What does it mean?

Savers will need to save more and work longer. Assuming an equity return profile more in line with nominal global growth of 4 to 6%, an average worker will need to work for another ten years to accumulate the same nest egg as before. The make-up of investment portfolios will also change. A demand for greater flexibility, a focus on loss mitigation will all feature in investment plans, allowing for an array of new products.

Insurance companies: a recipe for trouble

The following is not a good business model: 1) offer savers a guaranteed income return; 2) build in little ability to walk away from, or alter the terms of, those promises; 3) maintain a large maturity mismatch, in which the length of the guarantees exceeds the average length of assets; and 4) watch interest rates tumble to record lows. Sadly, this is what many in the life insurance and annuity businesses have done, and they emerge as an industry heavily disadvantaged by today’s rate environment. Life companies in Germany, the Netherlands, Norway and Taiwan are in a particularly difficult situation.

Life insurers face significant headwinds

Levels of risk in major life insurance markets

What does it mean?

In a best case outcome, life and annuity companies will experience lower profitability and ROE. A more likely case is that we begin to see insolvencies rise amongst smaller and weaker players. We expect 10-20 business failures per annum over the next two years. This should not create a crisis, but it will lead to lower returns and occasional stress in a systemically important industry.

Pensions are licking their wounds

Plunging rates have exposed the underfunded status of defined benefit pension plans. Pensions are designed to cover a liability stream in which they pay retirees fixed sums, often for long periods of time. This is easy to offset by purchasing long-dated assets that generate a similar, or higher, income stream. This model breaks down if pension plans own too little bond risk and rates fall, which is precisely what has happened. Lower rates have boosted the present value of liabilities more than assets have risen, leaving pensions underfunded. Across markets such as the UK and US, more than 75% of pension plans find themselves with liabilities in excess of assets. The gap closed Q3 at record levels.

Pension liabilities are rising much more quickly than assets

Funding Ratio (assets/liabilities)

This understates the problem. Many non-corporate plans are in even worse condition and the use of unrealistically return expectations and overstated discount rates is widespread. Adopting realistic assumptions paints a picture in which US corporate pensions are underfunded to the tune of $600 billion. UK corporations, following the post-Brexit plunge in rates, are in a £960 billion hole on a full buy-out basis. US public pension plans likely face a mammoth $3.3 trillion shortfall, assuming plausible numbers.

What does it mean?

A pension crisis is lurking, but the near-term risk appears manageable. Unfunded pension obligations are akin to other liabilities such as debt, and companies are effectively becoming more levered through the deteriorating funding status. The bad news is that this issue is now large enough to remain an important factor in driving equity and bond valuations. It also portends the occasional failure of struggling companies without outsized pension holes. The good news is that most of these liabilities do not come due for years, relieving near-term pressures. The crisis, like most debt crises, will likely explode in the next recession. A decline in profits will further weaken pension-adjusted leverage metrics, and equity holdings within the pension plan will likely decline, exacerbating the pain. On the public side, bankruptcy is likely to become a more compelling option, requiring careful selection within the municipal bond arena in the years to come.

Seeking traditional portfolio diversification?

Count yourself among the losers

Investors seeking a diversified, risk-managed portfolio have typically looked to fixed income to provide diversification and balance holdings of equities and other risky assets. Bonds tended to move higher in value when risky assets moved lower. With rates so low, there is limited ability for rates to fall still further. This weakens the role of bonds as a hedging instrument. The chart below illustrates likely total returns for G4 government bonds under different economic scenarios:

Strong returns: You can’t get there from here

Twelve-month total return projections for G4 government bonds

Yields at zero simply do not offer the potential for strong returns. If you are looking for good returns from high-quality bonds, you can’t start from here. And if the equity portion of your portfolio declines by 20%, it will not be possible for fixed income to do the heavy lifting.

What does it mean?

Investors will focus on making their bonds work harder. This requires higher-risk portfolios designed to extract true alpha. It will likely mean the “search for yield” continues. It should ensure a continued focus on flexible products, multi-asset products and solutions that combine risks in a more intelligent way. Finally, it means that the widespread belief in the traditional balanced portfolio may prove to be disappointing. A portfolio of 60% equities and 40% bonds, for example, may not provide the diversification expected in a severe market correction.

Central banks miss their target

Central banks are running out of ammunition. They have cut interest rates but have failed to resuscitate growth. Central bank options are clearly limited, and even those that are available are likely be highly unpredictable. Policymakers have created a riskier environment, while failing to achieve their desired outcome. As they fumble to find a solution, it has also revealed that they too are struggling with answers. Credibility is waning.

What does it mean?

Central banks have few policy tools left that are likely to achieve the desired outcomes. Monetisation of debt is one option that will be considered by some, particularly Japan. Ultimately, it may prove to be the turn for fiscal policy to do the heavy lifting. This will take time, and may not be a panacea if improperly implemented. Expect more volatility, as markets may begin to question the efficacy of policy.

Challenges ahead

The “lower for longer” era is not without costs and side-effects. The principal side-effects were always understood to be positive. Low rates should spur credit creation. Low rates should make it more appealing for consumers to forego savings and consume. Low rates were supposed to make investment returns more compelling relative to cost of capital and boost capital expenditure. And low rates and QE should foster portfolio rebalancing, allowing investors to sell safe havens and reinvest in riskier assets, keeping the self-reinforcing dynamic aloft.

Some of these expected side-effects never fully materialised, and some of them are simply exhausted themselves. New tools are required. In the meantime, we are left with record low rates. The longer we are in this environment, the more painful it will become for many market participants.

By Jim Cielinski Global Head of Fixed Income

———
Important Information: This material in this publication is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments to anyone in any jurisdiction in which such offer is not authorised, or to provide investment advice or services. Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. The research and analysis included in this publication have been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. The mention of any specific shares or bonds should not be taken as a recommendation to deal. This document includes forward looking statements, including projections of future economic and financial conditions. None of Columbia Threadneedle Investments, its directors, officers or employees make any representation, warranty, guarantee, or other assurance that any of these forward looking statements will prove to be accurate. This document may not be reproduced in any form or passed on to any third party without the express written permission of Columbia Threadneedle Investments. This document is not investment, legal, tax, or accounting advice. Investors should consult with their own professional advisors for advice on any investment, legal, tax, or accounting issues relating an investment with Columbia Threadneedle Investments. Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws. Issued by Threadneedle Asset Management Malaysia Sdn Bhd, Unit 14-1 Level 14, Wisma UOA Damansara II, No 6 Changkat Semantan, Damansara Heights 50490 Kuala Lumpur, Malaysia regulated in Malaysia under the Capital Markets and Services Act 2007. Registration number: 1041082-W.a

The post Low rates are for losers appeared first on AdviserVoice.

Bond markets are full of surprises. Core government bonds have been one of the strongest performing asset classes in 2014, propelled in part by worrying signs of emerging market stress.

Emerging market (EM) debt has suffered relentlessly for nearly a year, scant reward for those emerging economies that spent most of the last decade bolstering their finances. Meanwhile, in the eurozone, Greece, Portugal, Spain, Italy and Ireland are among the world’s most indebted countries, and yet their bond markets have witnessed one of the most explosive rallies in history. Is this fair, and what explains this dichotomy?

The post Does debt matter? The diverging tales of the eurozone and the emerging markets appeared first on AdviserVoice.