More Rate Pain Due for Investors?

Recessions are rife in the developed world, but will the efforts to kick-start growth spell more pain for investors with liabilities?

(July 30, 2012) — More pain through low interest rates could be on the way for European investors as central banks mull options to relieve the economic crisis.

The Bank of England’s Monetary Policy Committee is set to discuss reducing the already record low rate of 0.5% in its meeting this week, Press Association reported over the weekend.

The report follows calls from the British Chambers of Commerce (BCC) and accountant and consultants Ernst & Young to help businesses across the United Kingdom grow by forcing down repayment rates on loans.

At the start of this month, the European Central Bank lowered the rates that would be applied across the Eurozone from 1% to 0.75%. With increasing pressure coming from a bailout  for Spain and a “negative” outlook by Moody’s for previously strong nations such as Germany and the Netherlands, this may be in line for further downwards movement.

Almost two thirds of institutional investors, responding to a survey by Allianz Global Investors, cited falling interest rates as a major risk.

Falling rates troubled twice as many institutions as rising rates, the survey found.

“The longer rates remain extraordinarily low, the more investors become restless that there is insufficient economic growth,” the survey said. “Holding secure bonds thus turns into a frustrating waiting game.”

Some Eurozone countries have already seen the yields on sovereign-issued debt fall into negative territory – meaning the investor pays the borrower to lend them money – due to the perceived “safe haven” status bestowed on their finances.

“Current interest rates remain a huge risk for one in five institutional investors and a considerable risk for almost 45% of the rest,” the survey continued. “They are a reminder that survey participants are not only worried about loss of capital from sovereign risk but also miserly yields. Countries with extremely low yielding sovereign debt and a traditionally high portion of fixed income in their asset allocation such as Germany and Austria are the most worried about current rates.”

Another worry for pension funds is that lower interest rates usually translate into higher liabilities, due to the discounting factor applied to the figure issued by the central bank.

Pension funds in the Netherlands have already riled against falling rates against which to discount their liabilities, while in elsewhere in Europe governments have allowed pension funds to use more realistic rates to measure future benefit payments.

The survey found the Netherlands were the most wary of falling rates: 78% of participants said they were a considerable risk, versus the 45% European average.

For the full survey, click here.