The Bank of England held its key rate at 0.5% and its asset-purchase target at £375bn, while the ECB’s Mario Draghi said the governing council of the central bank was comfortable “acting next time” and held its benchmark rate at 0.25%.
But while the announcements were largely expected, in light of comments by Fed chairwoman Janet Yellen on Wednesday, their implications are worth looking at in a little more detail.
In her prepared statement to the Joint Economic Committee of the US Congress, Yellen said: "The committee recognises that an extended period of low interest rates has the potential to induce investors to "reach for yield" by taking on increased leverage, duration risk, or credit risk.”
Pointing to the brisk expansion of both the high-yield bond and syndicated leveraged loan markets as evidence of this reach, Yellen added: "Spreads have continued to narrow, and underwriting standards have loosened further.”
Writing for Portfolio Adviser on Wednesday (7 May), Russ Koesterich, BlackRock’s global chief investment strategist made a similar point. “With interest rates still quite low, investors are grabbing for yield anywhere they can, and may be taking on too much risk in the process. As an example, investors have been pouring money into a number of peripheral European sovereign bond markets, such as Spain and Portugal. We’ve also seen corporate bond deals that have been massively oversubscribed.”
And while this is of concern, it is unlikely that we will see any significant tightening of rates in the near future – indeed Draghi hinted today that the ECB might consider cutting rates further at its next meeting in a bid to lift the low levels of economic growth in the currency block.
So what are the options?
The equity market continues to do well; the FTSE rose to its highest since February on Thursday helped skyward by the news that Barclays is making even deeper cuts to its investment banking unit. But, as Neil Woodford of Woodford Investment Management, commented to Portfolio Adviser earlier this week: “We are five years into a bull market, it is looking and feeling pretty mature, earnings and economic fundamentals have very much lagged the performance of stock prices.”
So, it is uncertain exactly how much potential return is still sloshing around.
House prices too have risen strongly, but here too commentators are advising caution and, indeed warning against the possible creation of a housing bubble, so treading lightly has been recommended.
For yield investors, income funds would seem a good place to park one’s money, but many of them face the same difficulties. So much so that some are even falling foul of yield requirements.
The GLG UK Income fund has become the latest to be moved out of the IMA UK Equity Income sector for failing to meet its three-year yield requirement, but it follows hot on the heels of other funds such as Invesco Perpetual High Income and Jupiter Responsible Income which were also recently moved out of the sector for falling short of their yield targets.
Looking forward
If the commentators are to be believed, the Bank of England looks most likely to be the first to blink in terms of raising rates, as Gary Shepherd noted earlier this month, but even the most optimistic forecasts don’t expect any significant moves before next year. Until then, investors in search of yield look set to have to continue looking in slightly more riskier areas. And, with that needs to come a cautionary sticker.
