2021: The year of the yield conundrum

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December 2, 2020

With global central banks determined to keep interest rates at close to zero, it is assumed investors will need to explore new corners of the investment universe in their hunt for yield. Peter Glaser, Head of European Direct Lending at Alcentra, believes the world of private debt offers a key opportunity.

Are we there yet? Read some of the headlines, and you might think we’re all set for a post-Covid world. From vaccines with strong success rates, to rising job vacancies it seems there may be light at the end of the tunnel. And yet, the truth is, we aren’t sure how the pandemic will unfurl from here. Admittedly, this may be a rather sober overture, but it underlines the fact that with investing, and, indeed, life itself, we only know what we know.

And what about those investors seeking new sources of income? Already, as the economic cost of the pandemic becomes apparent, governments around the world have brought interest rates to zero or below, laid the foundations for quantitative easing and embarked on fiscal stimulus. This in turn, has heighted the chances of rising inflation – and higher inflation would make real yields even more elusive. Against this backdrop of low and negative real yields, the question for investors now is how to achieve their investment objectives. For Peter Glaser, Head of European Direct Lending at Alcentra, the answers to the yield conundrum may be more obvious than we think.

“To begin with, I don’t think there are any magic yield bullets but there are options available,” he says. “People may be tempted to cast the net wider, to explore new corners of the investment universe in their hunt for yield but we think it may be less esoteric than that. Our view is that within every portfolio there is a place for less liquid credit investments and they needn’t necessarily be ‘obscure’.

“Now could be a good time to evaluate private debt opportunities that exist within diversified portfolios in sectors such as healthcare, selected consumer sectors, real estate, infrastructure – all of which could deliver a downside-protected stable income stream,” he continues.

Of course, there is a caveat to this approach – that private debt is less liquid than investment opportunities in syndicated markets. “Perhaps especially in the current low yield climate that’s an acceptable trade-off,” says Glaser, “Certainly it would appear so, judging by the inflows into private debt we’ve already witnessed during the past couple of years.”

Despite the economic spanner thrown in the works by Covid-19, Glaser remains optimistic. “This isn’t the first time we’ve experienced a catalyst that alters the way markets and investment strategies operate and it won’t be the last,” he says. “In the short term, it’s certainly a shift, but will it be a long-term realignment? We simply don’t know yet.”

An outlook on yields in 2021

That theme of optimism is picked up by BNY Mellon Investment Management market strategist Lale Akoner as she considers how the question of yield might play out in fixed income in 2021. “US high yield (HY) credit continued to perform positively in Q4 2020 as spreads tightened to beginning-of-year levels, but still remain above pre-crisis levels,” she says. “Over the next 12 months, I see further upside in HY credits as I expect the cyclical recovery to accelerate in the US and spreads to tighten further.”

However, she favors an active approach to security selection to avoid default risk in sectors most affected by the Covid-19 pandemic. “The amount of fallen angels in this space could offer further opportunities for active asset management,” says Akoner.

Similarly, she believes US investment grade (IG) spreads have room to tighten to pre-crisis levels. “IG continues to offer yield advantage over sovereigns and additional return sources outside of traditional equities. As the global economic recovery continues through 2021, we expect higher exposure to cyclical sectors will likely lead to better outcomes,” she concludes.


Investment grade: Bonds that are believed to be lower risk of default. They are usually issued at lower yields than less credit worthy bonds.

Sovereign debt: A type of debt instrument issued by a national government to support government spending. Cyclical sectors: Sectors made up of cyclical stocks, or stocks that are likely to follow the cycles of an economy through expansion, peak, recession and economy.

High yield debt: Bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds

Fallen Angel bonds: A bond that was once rated investment grade but has fallen to junk bond status because of the issuing company’s poor credit quality.


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Recent market risks include pandemic risks related to COVID-19. The effects of COVID-19 have contributed to increased volatility in global markets and will likely affect certain countries, companies, industries and market sectors more dramatically than others.

Views expressed are those of the author stated and do not reflect views of other managers or the firm overall.

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