Inflation & Interest Rate Expectations: Intensifying Risk or a Temporary Spike?
PGIM experts joined Conexus Financial’s 2021 Fiduciary Investors Symposium to discuss interest rates and inflation expectations.
Historically low interest rates are likely the new norm for the foreseeable future. This backdrop of a low-for-long environment will pose a significant headwind for income-starved institutions around the world. With central banks signaling a likely prolonged low-rate (and in some cases, even negative rates) policy supported by unprecedented asset purchases as a necessary stimulus for growth, investors will be compelled to search for yield across the credit spectrum, and both public and private asset classes such as structured products, private credit, direct lending, and real estate.
Aging demographics and market fundamentals have warranted a “low-for-long” interest-rate environment. PGIM Fixed Income’s Chief Investment Strategist, Robert Tipp, CFA, explored this theme back in Q1 2020, emphasized the firm’s long-standing “low-for-long” thesis for global bond markets—which has been a consistent view over multiple market cycles—and discussed the implications for long-term investors.
In the wake of the COVID-19 economic and market shutdowns, the avalanche of stimulus — both monetary and fiscal — has successfully bridged the world economy from the depths of the shutdown to the vaccine and rapid growth recovery stage. As the impact of the virus wanes in many parts of the world, there are already ample signs of an uptick in inflation. But will it last?
One of today’s most significant financial wellness challenges for workers is generating an adequate and sustainable lifetime income in retirement. Given today’s interest rate environment, it’s never been more expensive to generate income for retirement, whether trying to do so with guaranteed or non-guaranteed investments. This will require plan sponsors to rethink participant access to savings, investment, and income-generating strategies that ultimately improve retirement security, and help workers become more retirement-ready by meeting their liabilities and managing key risks.
In the face of market volatility and lower-for-even-longer interest rates, return expectations across equities and bonds are at historic lows. Demonstrating the potential to improve diversity and risk-adjusted returns, real assets, such as real estate, farmland, infrastructure, and MLPs, have become an attractive alternative for investors seeking income above the yield of traditional stock-bond portfolios. PGIM’s Institutional Advisory and Solutions (IAS) Real Assets Program provides bespoke research to help clients understand the opportunities real assets can offer as a diversifying asset class, inflation or growth hedge, and return enhancer in multi-asset institutional portfolios.