Navigating the shifting yields: Private Debt opportunities in the evolving Digital Bonds and Fixed-Income market

Obligate
5 min readMar 11, 2024
Private Debt in today’s digital and fixed-income markets — how to navigate the yield trends for safer investment alternatives

In an ever-changing financial landscape, savvy investors constantly seek new ways to diversify and enhance their portfolios. Private Debt is emerging as a popular choice for those aiming for portfolio enhancements and secured returns, distinct from the volatile nature of the stock and bond markets. This article takes a closer look at the Private Debt market, spotlighting its potential enabled by blockchain technology.

What is Private Debt?

Private debt represents a spectrum of investment opportunities, offering capital in forms such as direct lending, mezzanine financing, and venture debt. Unlike conventional public equity or debt, these private arrangements provide tailored financing solutions, making private debt a more reliable avenue for investors aiming for alternative investments with improved yields.

Why consider Private Debt?

According to S&P Global’s Research (1), there’s a narrowing gap between private equity and private credit investments, signaling a growing confidence in private debt. “Private fund investors committed 5.6 times more capital to private equity than private credit in 2019. However, the gap narrowed each subsequent year through 2022, when the figure was less than 3.9 times.

The primary allure? Private debt instruments typically offer stability, devoid of the price volatility seen in public markets. Though they come with reduced liquidity, these instruments provide a safeguard against short-term market fluctuations, ensuring your investment remains unaffected by price swings till maturity.

With potential rate cuts on the horizon and the appealing yields offered by US and EURO fixed income instruments, investors can capitalize on this evolving market to secure strong potential returns.

With inflation pressures easing, transitioning from cash to fixed income could be a strategic move for those seeking stability and growth. . Below are some specific factors in the regions that support investment opportunities in Private Debt and the interest for certain investors in including flexible fixed income assets in their portfolios.

In the US

US government bond yields, especially on longer-dated debt, hit multi-year highs in October. But more balanced Fed commentary and slowing US inflation has led borrowing costs to fall. UBS Wealth Management (2) expects yields to decline further and quality bonds to rally in 2024 and into the first months of 2025 .

Since peaking at 5.02% in October, the benchmark U.S. 10-year Treasury note yield, which moves inversely to the price, has initially fallen sharply on increased safe-haven demand due to the initial outbreak of the Israel-Hamas war.

Then, growing optimism that inflation will fall further and perceived dovish statements from Federal Reserve officials boosted expectations of rate cuts coming sooner, leading to a further fall in yields to a three-month low of 3.8% in December.

UBS reported their own Wealth Management trend expectations for 2024, with the following insights:

  • Yields can fall further in 2024, as growth and inflation slow.
  • Government bond yields are expected to fall in 2024, supporting positive returns for the asset class.
  • Weaker growth and slowing inflation should contribute to lower interest rate expectations.
  • Base case for the 10-year US Treasury yield is to stand at 3.5% by the end of December 2024.
  • Still, UBS Research inclines for fixed income to equities in the global strategy for 2024.

Expectations for select opportunities are set in riskier credit segments next year, including high yield credit and emerging market bonds. Diversification will be key.

Potential price increases in the fixed income market are expected to be present in high-quality (government) and investment grade bonds in the 1–10-year maturity range. These bonds usually offer a 2 to 5% APY to investors which in general terms could mean the drop in yield for fixed income investors with a 5–10 year maturity. This evidences the case for the alternative to the Private Debt Market and the rise of this alternative investments’ asset class in the Decentralized Finance (DeFi) environment.

Investors can consider a 5yr/10yr duration-neutral US steepener to hedge against risks of loose US fiscal policy and tight US monetary policy in 2024. This position may also benefit if the market raises its estimates for aggressive rate cuts in the US.

In Europe

In today’s economic climate, characterized by historically high cash yields and a preference for low-risk assets like “money market funds”, the dynamics of the fixed-income market in the euro area are undergoing a significant shift. As inflation eases and the European Central Bank (ECB) signals a potential summer rate cut, the moment seems opportune for investors to consider fixed-income investments.

European rate cuts as an upcoming opportunity for fixed income (3) in January 2024:

  • According to a Reuters poll, the European Central Bank will reduce interest rates next quarter, with 45% of respondents saying the reduction in borrowing costs would happen in June.
  • Inflation is reaching the proposed target of 2% placed by the ECB, reaffirming the next moves will take a downward trend.
  • Some investors expect reductions up to 150 basis points to take place in an approximate 1-year period, some of them debating if it would begin in April or June of this year
  • Assuming the above takes place, this represents an important opportunity for fixed income investments and the Private Debt market for europe-driven investors.
  • Issuers of private credit should also be facing a high demand in the market for asset managers looking to lock these yields.

The impending rate cuts are anticipated to drive bond prices higher, offering not only current high income levels but also potential capital gains. Historical data analysis suggests a shift from money market funds to bond markets when central banks ease monetary policy, signaling a potential reversal in euro money-market flows and substantial impacts on bond prices.

Timing is crucial in navigating this changing landscape, as historical patterns indicate that bond prices tend to rise ahead of the first rate cut. Investors who act early, historically are poised to capture significant gains, while those who remain in cash deposits or money market funds may experience declining yields, resulting in lower-than-expected annualized returns.

Despite existing geopolitical uncertainties and potential inflation shocks, the current high bond yields provide a substantial cushion against downside risks, moreover when the proper enforceability and risk enhancements are in place, offering a unique opportunity for investors to position themselves for attractive gains amidst the evolving fixed-income market. As yields decrease over the next few months, those who make the shift to fixed income now can navigate through potential volatility and position themselves for a strong investment strategy.

The Digital Bonds and DeFi Revolution

The integration of private debt into the decentralized finance (DeFi) space, especially through digital bonds, is redefining investment paradigms. This new era brings about unparalleled transparency, efficiency, and accessibility.

Obligate provides the tools and expertise needed in the Private Debt space, focusing on developing solutions that bring out the best in investment process efficiency, and the most advanced legal framework for Private Debt and Digital Bonds for companies to structure their financing and investment issuances. Learn more about how Obligate can enhance your investment strategy by visiting obligate.com.

To sum up, having the right source of Private Debt Investment Solutions that takes into account also flexibility for the investor, global enforceability, and proper well established risk enhancement processes, means having the right partner.

This is for information purposes only and is not intended to be investment advisory. Historical performance is not a guarantee or reference to future performance.

--

--

Obligate

Obligate is an investment platform that enables investors to explore and invest in on-chain bonds in a regulated environment.