Rising inflation has been a key concern to investors in recent years. With central banks reacting to stem inflation by increasing risk free rates, this has seen a corresponding correction in fixed income yields.
One of the world’s most monitored interest rates, the US 10-year Treasury yield, has risen from 0.9% at the start of 2021 to 3.9% at the end of 2023. Whilst inflationary pressures ease there are mounting expectations of a reduction in risk free rates in the coming months – this should result in a corresponding reduction in fixed income yields as we progress through 2024.
In comparison, life settlement market yields are largely influenced by the supply and demand dynamics in the life settlement market. As such, life settlement market yields continue to demonstrate their low levels of correlation to fixed income yields, and represent an important alternative for investors considering diversification to help smooth volatility.
Strong & Favourable Returns
Life settlement market yields have remained strong and stable in recent years, against a backdrop of more variable US Fed rates and fixed income yields.
Market data indicates that life settlement market yields2 have remained consistently between 10-12% in recent years, with the AM Best credit rating8 for policies in a typical life settlement portfolio averaging A+.
The following graph shows how life settlement market yields, fixed income yields and the US Fed rate have changed over the past 5 years.
Life Settlement and Fixed Income Yields 2019-2023
Low Correlation
Life settlements continue to demonstrate their low levels of correlation to movements in fixed income yields. The table below shows the correlation coefficient for life settlement market yields and fixed income yields, against changes in the underlying US Fed rate.
Life Settlement and Fixed Income Correlation Coefficients vs US Fed 1-5 years
The correlation coefficient is a statistical measure of the strength of the relationship between the relative movements of two sets of data. A correlation of -1 shows a perfect negative correlation, while a correlation of 1 shows a perfect positive correlation. A correlation of 0 shows no linear relationship between the movement of the two variables.
The analysis demonstrates the low level of correlation between Life Settlement market yields and the US Fed Rate. Whilst, as expected, fixed income yields show a high degree of correlation.
[end]
Notes:
- Both sets of analysis are based upon data compiled by SL Investment Management using 30 day rolling averages.
- Life settlement market yields are derived from SL Investment Management observed market data for the period 1 December 2018 to 31 December 2023. Yields are aggregated and averaged across all life settlement market sectors. Targeted investment strategies can achieve yields in excess of these averages.
- US 10-year Treasury data sourced from US Department of the Treasury.
- Moody’s Aaa is the Moody’s Seasoned Corporate Bond Yield Aaa daily averages, not seasonally adjusted.
- Moody’s Baa is the Moody’s Seasoned Corporate Bond Yield Baa daily averages, not seasonally adjusted.
- US Fed rate is the Effective Federal Funds Rate daily average, not seasonally adjusted.
- Moody’s and US Fed Rates sourced from the Federal Reserve Bank of St. Louis economic research data.
- A+ is the weighted average AM Best credit rating for the BlackOak Fund portfolio as of 31 March 2024.
Disclaimer
BlackOak Fund is an investment vehicle suitable for institutional and professional investors only and is not suitable for semi-professional, private or retail investors. This material is intended for “investment professionals” as defined in article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 and must not be acted or relied upon by other persons.
The information and opinions published herein do not constitute an invitation or offer to buy or sell life settlements or other financial instruments, nor an invitation or offer to undertake other transactions. They are published purely for information purposes. The information and opinions published herein constitute neither recommendations nor guidance for decisions concerning your investments and other matters, and do not have any advisory character whatsoever. Therefore, before making any investment or other decisions, you should seek the advice of a qualified specialist.
Past performance is not a guide to future performance, nor a reliable indicator of future results or performance. By investing, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest.
This material and the copyright in the content are owned by SL Investment Management Limited. The presentation and content cannot be reproduced, modified, republished or redistributed without the prior permission of SL.