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Public investors turn back to government bonds playing it safe

posted onAugust 16, 2020
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More public investors are looking to raise their allocations to government bonds than cut back, according to a survey conducted between April and June by Official Monetary and Financial Institutions Forum (OMFIF). 

More than a quarter of the 78 public institutions surveyed -including central banks, sovereign wealth funds and public pension funds-  said they plan to increase investment in government bonds, as the global economic shock has pushed them back towards safe assets.

It was the first time in the annual survey’s history that more investors plan to increase holdings of government bonds in net terms. At the same time, many public investors were also planning to add to equity holdings, but alternative investments such as real estate and infrastructure were also set to grow further.

According to the annual asset allocation analysis, central banks' stock of sovereign debt has already grown to 66% of reserve assets. Gold holdings have risen as well. Meanwhile, central banks have relatively reduced their equity holdings. Over the coming 12-24 months, 28% of central banks are planning to rebalance their portfolios towards sovereign debt, with 15% expected to add to their equity and corporate bond holdings each.

Sovereign and pension funds maintain a strong appetite for risk assets. Of the sovereign funds surveyed, 63% said they would increase allocations to infrastructure, while 44% are doing the same in equities and 38% in real estate. Among pension funds, 67% said they would increase their equity allocations, and 22% plan to move out of government bonds over the next 12-24 months. Meanwhile, central banks and sovereign funds also plan to add to gold holdings, at 11% and 13% respectively.

The dollar retains a significant share of public investors' currency allocations, with the euro a distant second, at 57% and 24% respectively. This is unlikely to change, as  allocations to the dollar and the euro are set to grow in the next two years. There was also widespread interest in RMB, but only 8% of institutions (10% of central banks) plan to add to their holdings over the coming 12-24 months.
Significantly, 90% of institutions, including 89% of central banks, said they would not be willing to use a digital special drawing right or basket of central bank digital currencies. 

Sustainability cemented as portfolio cornerstone: 76% of public investors hold green bonds, 20% hold green equities. Almost half of sample looking to add more sustainable fixed income.

Public investor assets grew by $1.9tn to $39.5tn, 5% AUM increase on 2019 driven by global equities and gold holding. Two-thirds of asset growth concentrated in Europe and Asia, with Latin American central bank reserves declining. 

Just five funds account for $571bn (31%) of the increase: Japan’s Government Pension Investment Fund, Norges Bank Investment Management, Central Bank of the Russian Federation, Stichting Pensioenfonds ABP of the Netherlands and the US Military Retirement Fund, benefiting from a booming equity market in 2019. 

OMFIF is an independent think tank for central banking, economic policy and public investment. The survey polled 750 institutions, including 490 public pension funds, 174 central banks and 86 sovereign funds with investable assets of $39.5tn or 43% of world GDP.