“With the loosening DElla European monetary policy, the most prudent investors must find new ways to protect and grow their capital safely. High quality bonds could be the solution they are looking for. ” Fabio Caiani, Managing Director, Head of South East Europe at Nordea Asset Management stressing that in 2025, in Europe, a wave of short -term deposits (hundreds of billions of euros) will reach the expiry. However, with the continuous monetary locking of the European Central Bank (ECB), the yields of bank deposits are losing attractive. Between June 2024 and January 2025, the ECB made five cuts to interest rates, reporting a slowdown in inflation in the euro area. Further cuts are planned during 2025, in line with the intentions of the ECB to revitalize the Economy of the Eurozone. As a result, deposits rates are expected to drop to 2%.
The challenge: how to invest liquidity?
Investors PA adverse to risk, in search of safe returns for their liquidity, could materialize real negative returns (i.e., adjusted for inflation) on account deposits. A development that has not been seen since 2022. This has been pushing more and more investors to consider the low -risk bond market to activate liquidity and obtain better opportunities to compensate for the erosion of inflation without altering the own risk profile.
In this context, the government bonds They can represent an option valid by virtue of their safety level. However, simply considering this segment of the bond universe is not the ideal strategy. Today the government bonds are affected by the growing pressure of the public debt in Europe, due to the persistent budget deficits. This context can reduce the yields offered and increase the risk of losses, as already observed since the beginning of the year.
Other tools Safe bonds can offer the same protection of government bonds: I Covered Bond (guaranteed bonds). The Covered Bonds are fixed income securities issued by Banks or Credit Institutes Mortgage and guaranteed by a pool of collaterals, such as residential mortgages or loans to the public sector. These bonds offer investors two levels of protection: the use of the issuers’s assets in the event of insolvency and, in addition, access to these pools of assets to cover (generally with a higher guarantee value). This double protection explains in part why, since the first Covered Bonds were issued, 200 years ago, no default has never been recorded
The added value of a dynamic allocation
Bond markets of government securities and the Covered Bonds -the expert explains -“present different inefficiencies. A dynamic allocation, together with an active and prudent management, can allow investors to seize the opportunities as they present themselves and generate a more constant performance potential over time through a more diversified strategy”.
However, “all this could leave investors in search of protecting their capital still exposed to the risk deriving from the fluctuations of interest rates. This is why it is essential to develop a strategy that is not based on rates movements forecasts, but rather on the management of the risk of interest rate and on the ability to grasp the potential of performance in different market contexts. With this approach, expert and active investors aim to exploit the impairments of the market. constant alpha, making its liquidity fruit “.
Between government bonds and Covered Bond
In conclusion, “If on the one hand the low returns of European deposits a Short term represent a challenge for cautious investors, on the other hand they open the door to more dynamic and potentially more profitable investment strategies. By diversifying in high quality fixed income tools, as government bonds and Covered Bonds, investors can obtain greater protection and stability, actively managing risks and opportunities in a macroeconomic context in constant evolution “.
Ultimately, “an active and dynamic approach allows investors to overcome the limits imposed by low performance deposits and to seize new opportunities in bond markets. With a dynamic strategy, it is possible to obtain more stable returns and protect capital in the long term “.
