Facing negative rates, all available investment alternatives

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THE negative rates are they bad or good? For those who are in debt, refinancing their debt at ridiculously low costs, if not even earning something, is a boon. Consider, for example, Germany, which refinances its public debt, even paying investors to sell Bund. Conversely, for investors who lend money and are desperately seeking remuneration for their capital, it is becoming a tragedy.
La Bce, even under the guidance of Christine Lagarde, will keep the deposit rates in negative territory for a long time (-0.50% the current level) and consequently the banks do not pay more interest on the deposits and sooner or later will also pay the negative burden to the current account holders. In Switzerland and Denmark it is already paid to keep the money in the current account above a certain threshold, but it is not long before the rest of Europe also adapts. What to do then with the savings? Where to invest them? For small investors it is becoming a problem also because of the investment grade bonds (IG) they are no longer able to offer satisfactory returns, both in the government sector and in the banking or corporate sector. Management and funds are not very attractive as they can no longer guarantee returns as in the past and, net of management costs and commissions, there is the risk of losing money by parking liquidity in products of this type.

There is little room for profit even with investment grade bonds

The simplest solution – Notz Stuck analysts observe – could be to buy government bonds or Investment Grade bonds that they are able to give the maximum certainty of repayment and at the same time a minimum gain. "However, we still do not come to a valid solution: see the returns of the main European government bonds, such as the German, French, or Spanish. In most cases, even on long maturities we have zero or even negative returns ”. The expected profit of German bonds, for example, fell significantly during 2019 and reached a negative value in recent months. The attractiveness of long-term securities, especially in countries where the prospect of interest-rate cuts is limited, is undermined by the increasingly lower probability of an increase in the stock price.

Against negative interest rates, the hybrid and convertible financial bonds option

"In short – reiterated by Notz Stuck – it is difficult to find a so-called" parking lot "for liquidity, convenient and safe. Therefore, for an investor who aims exclusively at the preservation of his assets, or not to erode it from inflation and the advent of negative rates, what solution can we offer? Unfortunately finding a simple and immediate application is a more than difficult task, but in any case we focus exclusively on the quality and liquidity of the assets. In the current state of affairs, it is possible to look for interesting returns in the selection of hybrid financial securities, like convertible bonds, or emerging market bonds denominated in dollars (USD). However, we must keep in mind that these assets could be quite volatile in difficult market conditions and that the current risk remuneration may not fully meet expectations ".

The alternative of bonds with negative returns

The alternative would be to invest in bonds with negative returns, but only from a trading standpoint. That is, buying securities for the sole purpose of selling them at higher prices without regard to yield. More than anything else for qualified and institutional investors, certainly not for small and medium savers who are looking for an alternative to parking the liquidity in the bank. Current inflows observed in Private Equity, Private Debt, real estate or structured products are confirming that investors are desperately seeking to allocate their money. But according to Notz Stuck “no one should give up the quality of their assets or their liquidity to generate a return for their portfolio. We believe that patience will be rewarded in the long run and that opportunities will come ”.



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