The move will exacerbate worries about long-term demand for equities, given that pension funds are already cutting their holdings, and will contribute to the ongoing “structural shift” towards debt markets, squeezing corporate bond spreads further still.
The rebalancing by insurance companies started in 2009 and is likely to continue until 2017, according to a fund flows model developed by Axa Investment Managers.
Axa argued that the reallocation concluded to date may explain up to 25 per cent of the slide in equity prices from pre-crisis levels and caused spreads on corporate bonds to tighten by as much as 80 basis points. However it said the effect on European government bond yields has been negligible.
The Solvency II rules stipulate the capital requirements insurers’ must meet to hold various asset classes. It is widely seen as pushing them to diversify their portfolios away from equities in order to cut their capital requirements and reduce volatility.
Corporate credit is becoming the “defensive asset of choice”, thanks to its historically low volatility, and short-duration credit is favoured over longer duration paper, steepening the yield curve for corporate bonds. Sovereign debt is also in favour and interest rate and equity derivatives are increasingly being used to manage risk.
Full article (FT subscription required)
© Financial Times
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article