LONDON (Reuters) – European insurers are snapping up more emerging-market debt, spurred on by worries that negative-yielding bonds in Europe might not offer enough returns to meet their future payments.
The move represents a shift for investors, who have usually filled much of their portfolios with high-grade bonds issued by developed-market governments and companies.
Euros - % - Insurers - Assets - Income
An estimated 250 billion euros, or around 5% of European insurers’ assets, are invested in fixed income, up from 2% to 3% five years ago, said people at several insurers.
Signs of the shift can be seen in their participation in recent euro-denominated debt issues by countries like Ukraine, Indonesia, Saudi Arabia, Romania, Croatia, Serbia and Egypt.
Roadshows - Saudi - Arabia - Ukraine - German
Roadshows for Saudi Arabia and Ukraine attracted German, Italian and French insurance businesses not previously active in emerging markets, a person involved in both issues said.
Euro-denominated issues make up less of the hard-currency market than issues denominated in U.S. dollars, but European insurers have a natural bias toward such debt. It eliminates foreign-exchange risk and capital charges for holding assets outside their home currency.
Hard-currency - Bonds - Alternative - Terms - Risk-reward
“Emerging-market hard-currency bonds offer a valid alternative in terms of risk-reward to euro zone core and periphery bonds,” said the head of the asset-management arm of a leading European insurer who asked to remain anonymous.
“We’ve sold some BBB European credit we’ve held and added instead emerging-market exposure of the same rating.”
Zone - Yields - Yield - Curve - Sub-zero
Faced with evaporating euro zone yields — the German yield curve has tumbled to sub-zero in its entirety for the first time on record — European insurers have turned to investment-grade emerging-market fixed income.
“Investors are engaging in a hunt for yield, which leads to increased demand for emerging-market debt, which offers attractive yield relative to other asset classes,” said a spokesperson for Allianz Global Investors, which manages just over 200 billion euros of the 571 billion euros in assets held...
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