Transition to the ‘new normal’ and global capital


A gradual transition to a ‘new normal’ will require global capital sufficient to support such a transition. The evidence suggests that global capital is sufficient. In 2018, an anticipated $2.2tn of US government and corporate bond issuance necessary to support fiscal policies and cover corporate refinance of maturing bonds is matched by an estimated $2tn in US domestic corporate cash reserves as well as another $1.5tn in US corporate offshore cash holdings. As bond yields rise, the opportunity costs of holding cash will become high and many dormant investors will re-enter the market. However, recent research from Blackrock (January 2018) shows that despite higher bond yields, global institutions plan to reduce exposure to equities and expand exposure to real assets – commodities, precious metals, real estate - rather than increase exposure to bonds and fixed income. Appetite for fixed income is linked more to private credit investment than to core products such as US


Treasury bonds. This suggests that US Treasury yields must rise further to attract investors.


In comparison to the US, European and UK government financing requirements are modest. The ECB, despite tapering, is still buying bonds and, like the US, there is a large EMEA corporate cash reserve amounting to $1.1tn (Moody’s July 2017 estimate). Given that European and UK 10-year bond yields are still 1.5% to 2% lower than US 10-year bonds, especially when ECB QE purchases are phased out in September, European and UK yields will also need to rise to attract investors. Given the role that global bond rates play in providing pricing benchmarks for commercial property, their movement is monitored closely by many property investors. The question is less about whether bonds will rise, but rather how far they will rise, and when?


ALLOCATION BALANCE FOR 2018 - NET CHANGE Global


Continental Europe


80 60 40 20


-20 0


-40 -60


Equities Fixed Income Hedge Funds Private Equity Real Estate Real Assets Source: Blackrock, 2018 Global Insitutional Rebalancing Survey, Jan 18 Cash US/Canada


When will the tide turn on commercial property? MIPIM 2018 | Colliers International


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