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Finding fixed income yield in alternative credit

Riding the tumult in EM debt
Loupe focusing on text on financial newspaper

With interest rates around the world set to rise this year squeezing fixed income yields, the alternative credit market looks increasingly attractive, says Nykredit Asset Management portfolio manager Lene Boserup.

Alternative illiquid credit covers a range of debt securities from long term commercial property leases to short term corporate loans.

The US Federal Reserve is widely expected to raise interest rates three or four times this year and most developed markets are expected follow the Fed’s lead which is likely to tighten bond yields.

But as investor appetite for traditional fixed income assets diminishes, lightly traded private debt investments could be an opportunity to gain higher risk-adjusted returns.

“You can gain Illiquidity and complexity premiums through extra spread due to the structure of the debt, relative to [more conventional] bond issues – such as collateralised loan obligation securities and asset backed securities,” Boserup told Expert Investor.

Boserup said other illiquid alternative credit strategies – such as private debt, direct lending, risk sharing capital/regulatory capital – could also provide yield due to their illiquidity premiums as well as often having variable or adjustable rates.

 EM debt still appeals

“Developed market credit spreads are really tight but there is still value in emerging market debt,” Boserup said.

“Emerging market debt funds have higher yields than developed markets, stronger growth expectations, and improving fundamentals.”

Investors certainly shared her view on emerging market debt last year when over €9.74bn was pumped into emerging market debt funds in 2017, according to Thomson Reuters.

Emerging market debt typically promises much higher yields (of 4% or 5%) than benchmark developed market government debt. Benchmark 10-year US treasury yields dipped below 2.8% this week; Germany’s 10-year yield decreased to 0.5%; and 10-year UK gilt yields declined to 1.4%, according to Bloomberg.

Boserup said Nykredit has a “broad strategy” that covered sovereign and corporate debt in local and hard currency.

As a fund selector, Boserup said she preferred funds that had managers who had flexible tactical allocations – including sovereign local currency debt as it separated interest rate risk and currency risk.

Nykredit Asset Management is the asset management arm of Danish banking giant Nykredit and has €23bn in assets under management.

 

Jassmyn Goh

Jassmyn reported from Sydney to New York to Jakarta before joining Expert Investor. She was most recently Features Editor at Money Management and Super Review in Sydney.

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