INVESTMENT ALTERNATIVES FOR LOW YIELDING STERLING DEBT
BY KATE MILLER & SHADRACK KWASA
We’ve recently written about negative rates in Europe and how European insurers can improve the yield on their portfolios. However, the low-yield environment is a global issue, not a regional problem. Of course, similar issues exist in the UK and have been exacerbated by the Bank of England’s (BoE) monetary policy response to the COVID-19 crisis.
The BoE action to drop short-term interest rates and inject yet more liquidity into the UK financial system has caused a universal fall in Sterling fixed income yields, with some yields now approaching negative territory. While this has boosted fixed income valuations, these low yields are a problem for UK insurers who are regularly reinvesting assets into investment grade (IG) bonds.
So how should insurers respond to this threat? We have identified three accessible investment strategies that UK insurers of any size can use to improve their yields on investment grade fixed income portfolios. These strategies have been designed with longevity in mind and take advantage of the BoE’s monetary policy outlook and should remain relevant over the medium to long-term.