NEAM Insights

Government Debt in the 21st Century One of the defining issues of our time is the debt sustainability of sovereign nations. For much of this century, governments around the developed world have lacked the political will or leadership to pursue fiscal austerity measures that would address large fiscal deficits and would put sovereign debt levels on a sustainable path. Politicians have made the determination that it is better to defer addressing the issue, get elected or re-elected, and leave the difficult decisions that may involve sacrifice for a later date or for someone else. The result of this procrastination approach has been ever rising levels of debt on both an absolute basis and relative to the size of the economy. Read More

Healthy Appetite for Risk in 2024 Risk appetite across the U.S. capital markets was strong in 2024. The U.S. economy was supported by low unemployment, resilient consumer spending, and optimism over the promise of large language models and AI. The Federal Reserve moved to a monetary easing stance, reducing both its policy rate and balance sheet. The final kick came from the sweeping election result, setting off expectations for a growth tailwind from easing regulations and tax cuts. Fixed income markets underwent their own transition. Treasury yields fluctuated over the period but ended the year both steeper and higher as shown in the chart below. Credit spreads narrowed significantly, leaving most sectors on the rich side of historical valuations. Read More

Deficits Don’t Matter…Until They Do The topic of deficit spending has long been debated. Rooted in Keynesian economics, the theory holds that governments should stimulate the economy by borrowing and spending during an economic downturn, and then reverse once the crisis has passed. But contrary to Keynes' theory, deficits in the U.S. have persisted even during thriving economies. Following the 1981-1982 downturn, the Reagan administration experimented with “trickle down” economics, a supply side approach suggesting lower taxes on higher income earners would encourage more economic growth and investment that would benefit the entire nation. Indeed, U.S. GDP took off as the highest marginal income tax rate was cut from 70% to 30% alongside other tax cuts. The economy went on to grow at an impressive 26% over the 8 years of Reagan’s presidency, along with ballooning deficits that continued throughout the decade. Read More

In the last several years, a tremendous amount of energy has been spent by various regulators, government agencies, trade organizations and other governing bodies around the world to put in place a myriad of mandatory regulations and voluntary guidelines relating to ESG, largely focused on climate change. Read More

Datacenter Asset Backed Securities (“ABS”) emerged in 2018 as a niche asset class with limited activity and investor participation. Fast forward to today and the market has grown to over $15 billion in debt outstanding1 and a liquid secondary market. We think the sector offers fixed income investors diversification, strong underlying fundamentals, and attractive risk-adjusted relative value. Read More

The Agency Mortgaged Backed Securities (MBS) market has been on a roller coaster between periods of excess demand and excess supply over the last two decades. This has been largely driven by the Fed’s quantitative easing programs, along with an ever-changing composition of the demand base. Prior to the GFC (Great Financial Crisis), Government Sponsored Entities (GSEs) could be counted on to support MBS, but that mandate no longer exists. Today, the upshot of the complex mix of supply side and demand side factors has left MBS in a more challenged technical position resulting in attractive spread levels for the high quality, highly liquid, fixed income stalwart. Yields on MBS now present an attractive entry point for insurance companies, with the opportunity to lock in intermediate-term yields at attractive risk-adjusted spreads. Read More

China has been the largest contributor to global growth over the last 20 years (contributing ~40% to global growth) and is now the second largest national economy in the world behind the US. China is the largest manufacturing centre, largest consumer market for autos and electronics and largest housing market in the world. Read More

Solvency UK The Solvency II regulatory regime came into force across the European Union ("EU") on 1 January 2016. Following the UK’s exiting from the EU, the UK Government announced a review of the Solvency II framework and launched consultations in April 2022. It followed up with final proposals on 17 November 2022 and revealed draft legislation on 20 June 2023. The Prudential Regulation Authority (“PRA”) followed up with a consultation on technical details on 29 June 2023. Read More

A lot has been written about the potential future impact of Artificial Intelligence (AI) on both the U.S. as well as the global economy. It is early innings in this game but we are already seeing explosive growth in tools for AI applications in businesses around the world. What better way to examine this than to take a look at one example of the potential use of AI in our business. Read More

Borrowing from Patches O’Houlihan in the 2004 comedy, Dodgeball, an adage comes to mind when considering corporate defaults: “if you can dodge a wrench, you can dodge a default.” This message applies in the wake of the recent high profile bank failures at institutions such as Silicon Valley Bank, Credit Suisse and First Republic, and are a vivid reminder about the importance of maintaining a disciplined approach to credit to dodge the potential pitfalls of the market. While insurance company investors may be seduced by attractive yields in riskier assets when spreads are tight, credit is widely available, and economic growth seems like a formality, the market turmoil in 2023 is a stark reminder that investment grade bonds do behave badly at times. Insurance company investors need to stay true to their principles to avoid material underperformance when times of stress and dislocation occur. After all, while the five D's of dodgeball (dodge, duck, dip, dive and dodge) are effective for the game, dodging distress in the market is best achieved by consistently maintaining discipline – especially during benign market conditions. Read More