Are insurance companies and pension funds "forced" to invest into Euro peripherals ?

There’s a bluntness about this one that we kind of like.

Barclays Capital’s AAA Investor note looks at the problems posed by the rally in long-term bonds (sub specie deflationitatis) on Thursday:

These developments pose a problem to most yield-driven real money investors, such as insurance companies and pension funds. 10yr yields are well below 3% not only in Bunds but also in the majority of agency, sub-sovereign supra and covered bond products,which are insufficient to match return targets that generally are close to the 4% mark.

Clearly, faced with a low-yield environment, many asset managers at insurance companies and pension funds focus on further lengthening the duration of their portfolio…

We already have Exhibit A of that — falling ultra-long yields. But as Barcap note:

While this will also help them match the duration of their generally longer-dated liabilities, they will not only struggle to reach their target return, given that in the recent move even 30yr swap rates decreased to 2.90%, but they would also be substantially exposed to potential mark to market in case yields would suddenly back up in a correction move.

In which case — how’s this for a left-field investment strategy, straight out of the European debt crisis (emphasis ours):

An interesting alternative to investments in core government bond and high-quality AAA products at the long end of the yield curve would be to exploit opportunities at the short end of the yield curve. Such opportunities come from European peripheral countries, as only these exposures would comply with the return target…

http://ftalphaville.ft.com/blog/2010/08/19/320486/the-big-pfffft-and-the-euro-peripherals/

 

Erm, so what?

 

I thought Europe is on the brink of break up. The Euro is finished. House of cards. Unsustainable economic systems...