David Grana, Head of North American Media, Clear Path Analysis - 8 Aug, 2016

Approximately $13 trillion in sovereign debt is yielding less than zero. And it doesn’t seem like this trend is set to let up anytime soon. The Federal Reserve’s plans to hike rates this year seems to be on hold for the foreseeable future, the Bank of England is likely to lower interest rates in order to stave off a recession, and the Bank of Japan is looking to provide stimulus for their own economy.

This is a challenging environment where fixed income managers need to expand their options and increase their creativity. US-based emerging market debt managers have seen a remarkable inflow of capital over the last couple of weeks, to the tune of $1.4 billion, according to Lipper data. With 10-year government bonds in emerging markets yielding at least 5%, it’s not too difficult to see why portfolio managers are increasing their exposure.

Private credit has also benefitted from low yields, with funds seeing a 16%+ year-on-year flow increase, according to Preqin. The illiquidity premiums have yields in the high single digits and into the low teens for investors, with capital being tied up for less time than with private equity investments.

Insurance portfolio managers have probably seen some of the biggest challenges. They not only are stared in the face by low rates, but they also have to contend with pressure from regulatory and credit agencies as well. Insurers have now expanded their allocation into riskier forms of debt, including corporate debt and mortgage-backed debt. Corporate bonds have seen inflows of over $500 billion since 2009 from insurers alone.

The low yield and negative yield conundrum does not appear to be disappearing anytime soon. In fact, if yields get squeezed any tighter, there is a potential of crowding in some fixed income spaces. And the challenge is not just for pensions, endowments, foundations and insurers. Asset managers will need to prove their worth as the space becomes increasingly competitive.