Dear colleagues, Negative-yielding debt now tops $17 trillion dollars, or 30% of the entire global bond market, according to a recent news story from Bloomberg1. Just stop and think about that. Buying those securities locks in a loss in nominal terms not to mention in real terms. That means that the duration of the bonds is longer than the maturity. There has been plenty of discussion about how low interest rates in the U.S. put pressure on insurers’ earnings. But, compared to other parts of the world we’re trading like high-yield. Consider Greece, whose debt reached a yield of around 48% in March of 20122, is now trading 34 basis points3 through 10-year Treasuries. That is a data point that sticks in my head. Of course, we all know that low rates lower borrowing costs which in turn spurs the economy. But what if it doesn’t? What if a borrowing rate of zero doesn’t really move the needle? The bond guy in me says that the market is pricing in deflation – an ugly word. After all, why would a rational person buy something today that you’re pretty sure is going to be cheaper next month? That is an economic condition without an easy fix – just ask Japan with their “lost decade”. Despite an unprecedented bond rally, a sign of run for cover, the stock market continues to climb and that’s the conundrum for many. Which signal is the right one? Are the markets pricing in deflation or do low rates power the economy which in turn drive stocks higher? These are the tough questions facing all of you, the insurance asset management community. It’s not like you can sit in cash. And, it sure is tempting to reach with spreads this tight. I am in the enviable position of speaking with a number of very smart money shops, both internal teams and external asset management firms. All of them are scratching their heads because none of us have ever seen a bond market that looks like this one. It’s a tough environment, but I’ve heard that said every one of my 30+ years in the capital markets. We will successfully navigate this one, too . . . hopefully. Best regards, Stewart

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