Fixed income is the heartland of insurer and pension fund investment strategies. Analysing trends, and predicting where interest rates and bond yields might be heading have been core competencies for generations.
A new research paper from Aviva Investors now challenges investors to ask whether they are ready for the shift from price rich to data-rich assessments of value, a “revolution with Big Data as the sponsor”, states the paper.
Have you heard of the Billion Prices Project, Project Neptune or Katana?
These are some of the powerful data analytics tools powered by artificial intelligence that Aviva Investors argues will fundamentally overhaul the way fixed income analysis is carried out.
“It is easy to imagine a situation where real-time economic statistics will replace the traditionally infrequent (monthly and quarterly) economic time series, creating with it a revolution in fixed income management”, says the paper. This real-time data is already widely available and should be playing a part in the management of fixed income portfolios.
The modelling and prediction of yield curve movements has never been a precise science, and the challenge has only gotten tougher over time.
“No one theory has satisfactorily answered the question under all circumstances throughout history. It has been a vexed question ever since yield curve management came to the fore in the 1970s, and one that has been harder to answer since central banks started manipulating and nudging markets through massive quantitative easing programmes that have taken some of the ‘free’ out of the free financial markets”.
That is about to get harder still with central banks now sharply diverging in these key policy areas. The US Federal Reserve is leading the rush away from rock-bottom interest rates while others, such as the European Central Bank and the Bank of Japan, are holding the low interest rate line. The Bank of England and the UK government have signaled a cautious move away from the policies of the last ten years with modest interest rate increases and pledges about ending austerity. “The Great Divergence” is how Aviva Investors sees this trend.
It argues that artificial intelligence and big data have major parts to play in helping investors understand what is happen in fixed income markets, especially as the relentless pressure from demographic change forces them to embrace a greater diversity in fixed income portfolios. The ability of AI to collect, monitor and analyse vast amounts of data from sources unimaginable just a few years ago – corporate activity, online and offline consumer transactions, private and public borrowing, social media – will give firms that understand and embrace its potential a competitive edge.
No-one wants to be holding the wrong bonds if – or rather when – the next credit crisis bites : “Predicting the future of the economy is one thing, but bond investors want to know whether interest rates are rising or falling, what will happen to the yield curve and, just as importantly, the likelihood of companies they invest in going bust and defaulting on their debt”, says Aviva Investors.
The full paper can be downloaded here.