The resurgence of Treasury Bills has not gone unnoticed by banks and insurers. In the case of the former, they began 2022 with a portfolio of 8,500 million euros, but as the months progressed they have warned of investment in state paper in the short term, reaching a maximum of 13,606 million euros in October last year (the latest data provided by the Public Treasury). In other words, in just ten months, the held-to-maturity portfolio of this type of investment has grown by 60%. In the case of insurers, the investment in Letras del Tesoro in October has more than doubled the amount with which they started 2022. Thus, in January it stood at 1,024 million euros, while at the end of October they exceeded 2,500 million (an increase of 153%).
The explanation for this shift must be found in the change in the monetary policy of the European Central Bank (ECB) to control runaway inflation caused by the war in Ukraine and the energy crisis. This led the body chaired by Christine Lagarde to undertake very aggressive rate hikes (up to 75 basis points at the September and October meetings) that have pushed interest rates to end 2022 at 2.5%. These movements were reflected in the six-month bills, for example, which went from offering a return of -0.57% in January to 1.56%. For one-year bills, the remuneration was close to 2% in October.
Víctor Alvargonzález, director of strategy and founding partner of Nextep Finance, explains that this movement makes perfect sense. “If they increased the term at a time when more rises in bank rates are expected, and insurers ran the risk of not having enough liquidity to buy longer-term bonds with a yield that had to continue growing, as it has been” and proves of this is the evolution of the bond in the last months of the year. On the other hand, there was the risk of the price falling due to the inverse relationship with longer-term profitability.
Banks do not ignore bonds
These movements do not mean that banks have stopped acquiring longer-term government debt. In fact, although in October they eased the accelerator a bit, they have 150,000 million euros of bonds in their to-maturity balance. Specifically, the entities had 150,012 million euros in long-term paper, while in September they amounted to 150,600 million. According to the statistics of the Public Treasury, the banks have bonds for an import greater than 150,000 euros since August. In addition, the maturities portfolio has not been above this figure since 2016, when it reached 153,000 million euros, although the maximum was reached at 205,000 euros in 2014.
And it is that this portfolio, known as ALCO, is essential for financial institutions since they allow them to increase their intermediation margin and income from the coupon they pay. But also because it means having liquid assets and sovereign debt is one of the most liquid there is. As for insurers, they have also replicated this movement. Thus, these companies have spent two months with a portfolio of long-term paper maturities above 72,000 million, although the data for October, of almost 72,300 million euros, is somewhat lower than that of September, which exceeded 72,400 million.
But this movement of banks and insurers has been double. One could not speak of increases, if they would not have lightened their portfolio first throughout 2021, after the pandemic had increased it, seeking refuge in safe assets.
Follow opportunities having in fixed income
The truth is that the opportunities that both banks and insurers have seen in fixed income in 2022 will continue to occur this year. Emilio Ortiz, investment director of Mutuactivos, explains that thanks to this rise in interest rates and the rise in risk premiums, a fixed-income portfolio can be built with attractive returns in the medium term. “The fall in prices implies a sharp increase in potential profitability. Today we can find investment options with returns of more than 4% without having to take big risks”, the expert qualifies.
And anticipating, as banks and insurers are doing, has a prize. Pramod Atluri, a fixed income manager at Capital Group, recalls that investing before interest rates have peaked has historically been favourable. “In the last 40 years there have been six rate hike cycles. If in each of these cycles an investor had started investing in fixed income six months before the last rate hike of the Reserve 10.2% in the first twelve months.” In the longer term, said investment would generate a five-year annualized total return of between 5.9% and 15.6%, adds the expert.
