Stagflation and credit defaults – chasing yields gives way to minimising risk
The macroeconomic context has definitively changed structurally to one of stagflation and increasing concern about financial markets and international security. Investors have to worry about more and more risks: Duration risks (Silicon Valley Bank), liquidity risks (Credit Suisse), credit risks (Moody's expects defaults on euro high-yield bonds to double in 2023), acute valuation risks (real estate, private equity) and high volatility (listed equities). All this leads to the same classic reaction of investors: until the environment has changed again towards more optimistic expectations, "flight to quality" is the order of the day. Or more precisely: "flight to safety".
Flight to safety
There will therefore be a shift in real money. Whereas previously the focus was on the desperate search for yield in the illusion of perpetual debt at very low cost and no defaults, we are now shifting to strategies aimed at avoiding losses. The balance is shifting from a frenetic search for yield back to an attitude of risk minimisation.
In addition: the long period of negative interest rates did not end until 2022. Higher interest rates (above 4% for corporate bonds) mean, from an investor’s perspective, that they no longer need to invest in the riskiest asset classes.
Now interesting: short-dated IG bonds and floating-rate secured personal loans
In this emerging trend, the preferred asset classes are also shifting. Short-dated investment-grade bonds will most likely be the first to attract interest, as they are liquid, have a low duration risk and a low default risk. In addition, those segments of non-exchange traded debt (private debt) that can offer floating rates, a strong package of collateral and a solid illiquidity premium will be attractive.