2023-06-07 04:30:02
Bonds have recovered thanks to the rise in interest rates. The offer is vast and the yields attractive, particularly in the context of its life insurance. Should we be tempted? No doubt, but with caution…
Stocks or bonds? The question is as old as the financial markets. If opposing them is a shortcut, the fact remains that these two active ingredients do not have the same philosophy. Let’s go back to the basics. On the one hand, stocks are titles of ownership of shares in companies. They make it possible to place on orientations and to profit possibly from dividends. Listed or not, their valuation depends on the perception of the vitality of society.
Conversely, bonds are capital loans to governments or companies. A loan, therefore interest: the issuers undertake over a given period of time to deliver coupons, known in advance, before returning the capital. Like any credit, the yield is linked to key rates: the higher they are, the higher the coupons will be.. These securities have a resale value on the secondary market. This is not constant, and varies according to their remuneration in relation to the market.
Bond rates, a boon
There is a tendency to speak of a pendulum effect: if growth is announced, it is time for actions, because the valuation of companies will increase. However, if recession looms, bonds attract, because their coupons make it possible to maintain a good yield. This opposition was valid over certain periods, but we must not be categorical, analyzes Philippe Dupuy, professor at Grenoble EM and specialist in financial markets. Because monetary policies have an impact on the various assets.
Precisely, for nearly 15 years, the latter have been very accommodating. Central banks kept rates very low to preserve growth. However, these rates adjust with inflation, in an attempt to curb it. Last year, it suddenly took off, leading to a rise in interest rates. This rise in key rates was surprising, confirms Sandy Campart, research professor at the IUP Banque Finance Assurance at the University of Caen Normandy. No one imagined a movement of this strength and this dynamic. In the United Kingdom, 10-year rates were multiplied by 3, from 2% to 6%. In the United States, they more than doubled, from 1.5% to almost 4%.
It is normal that savers are interested in it. There are good yields.
Bonds followed, suddenly offering 3% or even 5%. A boon. It is normal that savers are interested in it, judge Sandy Campart. There are good returns on fixed income products, including money market. It had been a long time since we had seen that.
However, the researcher qualifies: inflation deducted, the real return remains negative. This is the case for almost all products on the market. Thus, the euro funds of life insurance, compasses of savings, deliver only 2% on average, while shares are experiencing high volatility. Insurers are not mistaken: the speeches on shares or ETFs have given way to the mix between euro and bond funds to boost life insurance.
The 2023 list of 2022 rates for life insurance funds in euros
The different formulas for buying bonds
How to invest in bonds? Some brokers offer direct purchase, with floors varying between 1,000 and 100,000 euros. But it’s complex: high costs, taxation, difficulty of resale… Many individuals therefore prefer UCITSeasy-to-manage baskets of bonds, whose valuation changes according to the lines that make them up.
Other products are less known: dated funds, which resemble UCITS with a known maturity date. There is also bond term accountsdate funds whose capital is blocked.
Shares, bonds, UCITS, ETFs… The different transferable securities
We even see the appearance of structured products with guaranteed capital and return during a given period. During the first week of April, Spirica and Linxea also offered Impulsion on the Spirit 2 contract. The promise: 4% gross until 2027, with 100% guaranteed capital. There is no suspense, we know what we are going to gain, Yves Conan, CEO of Linxea, told us recently. This improves the return on the portfolio.
A lot of these vehicles can be included in life insurance. AG2R-La Mondiale has even tested an Air France live obligation on certain contracts. We think regarding it, because these products have an easy grip, slips a competitor.
These rates are higher than those for the general assets of insurers. They have a certain inertia, because the yields are smoothed over several years, reports Sandy Campart. The situation is changing, but it will take time!
The risk is that the upward trend in interest rates is not completely over
Should you bet on bonds?
Should you move your capital towards these attractive products? If he refuses to give any investment advice, Philippe Dupuy understands that the question arises. But beware: this is not the new martingale! The risk is that the upward trend in interest rates is not completely complete, given the dynamics of inflation, says Sandy Campart. Because the prices of basic products continue to swell. Inflation is therefore not completely apprehended and controlledwarns the teacher-researcher from Caen.
Analysts imagine that it will last until the end of 2024! In this case, the rates might follow… and the new bonds will pay even more! Blocking 3% or 4%, if tomorrow the market offers 6%, it’s a real shortfall. Furthermore, since the resale value varies according to the performance of the coupon, these bonds would be in unrealized loss. Philippe Dupuy is pedagogical: If a remunerated account offered a blocked rate of 3%, what would it be worth when, opposite, another reported 6%? Much more!
This latent value has no impact if you keep your date fund or structured product until the end of your chance: you will recover your capital in addition to the coupons. But not everyone goes to the end, reminds Sandy Campart. You really need to have a fig investment horizon.
UCITS, for their part, reflect in their value the evolution of the situation. As they have no chance, the capital is not guaranteed. Must therefore manage your motion when you have red lines on your contract. Even if the loss does not materialize, savers find it difficult to comprehend. Sandy Campart therefore believes that it can be interesting to position oneself, but cautiously. It might be a good time to go home, but probably not on the most distant chances. Or else in a staggered way: invest gradually over the next few months, to smooth out the risk. Because he does not deny it: 4% over a few years is not bad in the current context.
The risks of bonds
However, Philippe Dupuy warns regarding the notion of risk adjusted return: In this case, the diversified euro fund might be better than a bond. Because the bondholder is not infallible. The risks are of two kinds, explains Sandy Campart. The first is that the issuer fails. We experienced this with Greece.
The other risk is therefore, as we have seen, interest rate fluctuation. a, we do not see it on euro funds, notes Sandy Campart. If an economic slowdown sets in, it will threaten businesses and their bonds corporate.
Our experts therefore cast doubt on solo titles, such as Air France. It’s betting on Air France, inflation, oil… It’s extremely risky!, launches Philippe Dupuy. This would put the holders in a risky situation that they are not obliged to take, rebounds his colleague. By mixing 50 or 60 bonds, date funds dilute any business defaults.
What to do? Sandy Campart provides an answer… from Normand! It depends on everyone’s expectations. If you think that interest rates will fall because we are entering a period of recession, you might as well bet on the longer odds. To have the maximum as long as possible.
We must first think regarding diversification and protection of heritage
Conversely, if stagflation (inflation and economic stagnation) is anticipated, short-term products are preferable… An uncertainty that prompts us to be patient and measured. For a home, you must first think regarding diversification and heritage protection, slice Philippe Dupuy. He has nothing once morest the bond in a diversified portfolio, but it can not be a tool that carries a substantial portion of the heritage.
A trajectory is nevertheless emerging: it is rumored that it will be difficult for central banks to raise key rates further. We do not see the American rates going to 10%, admits Sandy Campart. A current bond is therefore likely to be well positioned within three or four years. Because following having curbed inflation, the objective of institutions will always be to relaunch growth by lowering interest rates as soon as possible. But we are not there yet…
An economic slowdown, a settlement of the Ukrainian crisis, it will be rather unfavorable to inflation, explains Philippe Dupuy. In this case, we can estimate that it will be the moment of the bond. This seems to be the point of the story. But as another adage in economics goes, you have to remain humble in the face of the markets.
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