Fixed Income Investors Decrease Duration and Increase Credit Risk
Singapore, Nov 30 2020
Welcome to Canopy’s Investor Behavior Newsletter (Week 49 of 2020), where we analyze trends seen in our investment reporting activity.
In our newsletter two weeks ago we had put a chart of investor’s asset allocation between equities and fixed income . At first glance it seems like risk appetite in both equities and fixed income is back to the Jan 2020 levels.
While risk appetite is certainly back, the chart above shows that the average maturity profile of fixed income portfolios reduced over the year.
At the same time there was a clear shift in allocations from Emerging Markets into Frontier Markets (see chart below).
The above investor activities imply that:
- Fixed Income investors expect rates to rise in the future and therefore are staying focused on shorter maturities.
- Investors are going for worse credits to compensate for loss of yields and betting that the easy liquidity conditions will keep defaults low.
This focus on shortened duration and worsened credit is a common strategy followed by investors towards the end of a rates easing cycle and has been observed many times in the past. It has worked sometimes, and some other times it has ended in tears :(
Please note that this newsletter is just a data analysis of actual investor behavior and does not constitute investment advice in any form.