ECB Bubble Means Sovereign Bonds Aren’t Worth It, Swiss Re Saysby
Reinsurer moving more of its investments into corporate debt
Governmment bonds don’t compensate for the risk, Fuerer says
The European Central Bank has turned government bonds into one of the riskiest asset classes, prompting Swiss Re AG to move more of its investments into corporate debt, according to the reinsurer’s chief investment officer.
“If you’re looking for a bubble, here you go,” CIO Guido Fuerer said in an interview in Zurich. “With government bonds, you’re not adequately compensated for the risk you’re taking.”
Low or negative interest rates combined with volatile markets and ECB asset purchases are squeezing the investment margins of insurers, which are large buyers of fixed-income securities, pushing some to seek higher returns elsewhere. Swiss Re, which oversees assets of $140 billion, boosted its allocation of corporate bonds to 33 percent of its total investments by the end of 2015 from from 20 percent at the end of 2012.
“We are not immune to negative rates, but we’ve compensated a lot since we’ve re-positioned from government bonds to corporates,” Fuerer said. Credit investments are now at a “good level” at 42 percent of the total, he said.
The yield on German 10-year bonds fell below zero for the first time this week and Japan’s went as low as minus 0.21 percent. The global pile of negative-yielding debt has swelled to $8.8 trillion, according to the Bloomberg Global Developed Sovereign Bond Index. Rates on Switzerland’s 30-year bonds also dropped below zero for the first time on record.
Swiss Re joins a chorus of institutional investors such as German insurer Allianz SE that are voicing concerns over the state of the government-bond market. To encourage growth, the ECB has bought more than 800 billion euros of the debt since March 2015 and is now adding investment-grade corporate notes to an 80 billion-euro monthly purchase program that includes covered bonds and asset-backed securities.
Government Bond Blues
Allianz said it plans to boost its corporate-debt holdings as sovereign yields fall. Central banks have created “a supernova that will explode one day,” Bill Gross, manager of the $1.4 billion Janus Global Unconstrained Bond Fund, said in a tweet last week. In April last year, the former chief investment officer at Pacific Investment Management Co. described German bunds as the “short of a lifetime.”
Swiss Re won’t chase yield-boosting investments into riskier asset classes, Fuerer said. The company is seeking returns in asset classes such as infrastructure loans, private equity and real estate, even though the latter two carry high capital costs for insurers.
“We’ve reduced our holdings in hedge funds and have no plans to change our current exposure meaningfully.”