With no end to low yields in sight, retail and institutional investors join forces

 

With the ECB and Federal Reserve supporting financial markets with further interest rates cuts and additional bond purchases, comparative returns in alternative lending are extremely attractive. At the same time, the best loan originators can now provide longer track records. These factors are encouraging both retail and institutional investors to move into alternative lending in Europe.

Since the financial crisis in 2008, yields on 30-year German government bonds have been moving around a falling trend line that is now bottoming out in negative territory, while yields on 30-year Italian government bonds have similarly fallen during the same period, except during the Greek financial crises of 2011 and 2012 (see Figure 1, below).

Figure 1 Development in 30-year government bond yield

                                          

During the Greek crises, the spread between German and Italian 30-year bond yields widened to more than 4.5 percentage points. After the crises, the spread started narrowing to under 1.7 percentage points, as the ECB began to implement its long-term refinancing operations. Towards the end of 2018, the ECB announced that it would only reinvest the received principal of matured bonds, causing the spread between German and Italian 30-year bond yields to widen again to almost 3.0 percentage points.

However, since the market has understood that the ECB will most likely lower interest rates further, along with resuming its bond purchase program, the spread is again below 2 percentage points.

Figure 2 ECB Balance sheet at end of year

Figure 2  suggests that the ECB’s balance sheet will be even larger by the end of 2019 than it already is and will continue to expand at least until there is any announcement that ECB bond purchases will cease.

It is therefore difficult to envision a scenario in which yields will move much from current levels unless the ECB lowers rates again. A shift towards higher yields would require the ECB to stop buying more bonds and a clear statement that it will start reducing its balance sheet to a more normal level - in our opinion, this scenario is at least 2-3 years away.

Alternative lending - a maturing market

In Europe, alternative lending now has a track record of almost five years, and the market is maturing.

Figure 3 Number of retail investors on Mintos

Two factors are worthy of mention in this regard: firstly, loan originators are now offering loans that are recognised as being of good quality, and all processes around buy-back guarantees and default events have become increasingly solid; secondly, the interest rates offered to retail investors are very attractive compared with the negative yields now prevailing on all high-quality government bonds or with interest rates on bank deposits.

The consequences of these developments can be seen in Figure 3, which shows that the number of retail investors active on Mintos (Europe largest peer-to-peer lending platform) is growing fast. Currently, there are close to 200,000 retail investors on Mintos, around half of which joined during the last 12 months.

With maturity and a track record of five years, institutional investors are now joining as well. Loan originators and platforms are now seeing a steady interest from professional investors who value risk diversification, high yield and the opportunity to invest in assets that are uncorrelated with most other investment forms.

Going forward, we expect that alternative lending in Europe will be considered as an investable asset class.

You can invest in alternative lending with Quantrom P2P Lending DAC by subscribing to our profit participation note on our website: Quantrom.com or Quantrom.dk (Danish version) where more information for investors is also available

About the Author

Gustav Jensen

Gustav is the managing director of Quantrom Limited and is living in near Brussels.

Economist from University of Copenhagen mainly working in finance and banking.