Factors such as the normalisation of monetary policy following the US’s withdrawal from quantitative easing and investor demand for higher compensation to counter increased illiquidity are all playing a part in a normalisation of “term premium” .
That is the assessment of big institutional investment house, QIC, which this week predicted a term premium normalisation of around 50 basis points.
Commenting on the prediction, QIC global liquid strategies managing director, Susan Buckley said that for some years, the term premium had all but evaporated or even been in the negative which meant there had been no excess compensation for investors holding long-term debt.
“But we have identified a range of global factors that signal a return to higher levels – and believe investors should be acting upon this return sooner rather than later,” she said.
Buckley claimed these factors included a “normalisation” of monetary policy following the US’s withdrawal of quantitative easing, investors’ demand for higher compensation to counter increased illiquidity caused by increased regulation in the finance sector and the general expectation of higher interest rates and inflation.
However QIC global liquid strategies director of research and strategy, Katrina King said investors needed to understand that the return of the term premium did not signal a return to “normal” noting that the term premium had spiked three times since the global financial crisis, showing that term premium could move quickly and undercut unprepared portfolios.
