Theme 3:
Rising interest rates and
inflationary considerations
In the fixed-income sector, insurers will increasingly adjust
their investment strategies to prepare portfolios for a rising
interest rate environment.
Interest rates in developed countries are at an historic low. But
the sustained period of low interest rates supported by the US
Federal Reserve and other central banks in response to the global
financial crisis is now expected to give way to a new environment
as quantitative easing support for markets is progressively
withdrawn. With policymakers increasingly optimistic about their
economies being back on the path to sustainable growth, monetary
policy could soon tighten, prompting a rise in rates and a fresh
opportunity for insurers to review their asset allocations.
Many traditional portfolio managers are becoming more alert to
the anticipated impact of rising rates. While yields on developed
market bonds have been falling, the duration on benchmark bonds
has risen, leaving many fixed-income portfolios with higher levels
of duration risk.
In the fixed-income sector, insurers will increasingly adjust their
investment strategies to prepare portfolios for a rising interest
rate environment, within the limits set by their economic capital
frameworks. For example, average portfolio duration can be
reduced by adding exposure to the short end of the yield curve
or investing in floating rate instruments. Outcome oriented or
absolute return fixed-income investment strategies may also be
considered if the economic benefits of such strategies translate
into regulatory capital benefits.
At BNY Mellon we work closely with our clients within the
institutional investment communities to develop investment
strategies to mitigate potentially negative impacts of rising
interest rates and inflation in order to limit potential asset/liability
mismatches and maximise portfolio returns.
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