Market movements weighed down interest income
The return on fixed-income investments remained slightly negative, at -0.4%. They accounted for 30% (32%) of investments and had a market value of EUR 12.3 (12.8) billion.
Fixed income investments consisted of loan receivables, mainly pension loans to Varma's customers, and government and corporate bonds, and money-market instruments.
Fixed-income investments, %
Low interest rates and large rate movements lowered interest income
The fixed income market experienced a significant correction in the area of eurozone government bonds. The ECB’s expanded public sector bond purchase programme that was launched in March pushed long-term interest rates in the eurozone to a record low. The interest rate levels of bonds with a shorter maturity fell clearly into negative territory. The strong correction in interest rates starting in late April caused one of the fastest downward spirals in the price of eurozone interest-bearing securities in their history. Towards the end of the year, interest rates started to decline again, but the expected interest hike by the Fed caused fluctuation in the fixed-income market.
Corporate bond markets were weighed down by concerns over China’s economic growth and the steep decline in energy prices, which influenced especially American corporate bonds with a lower credit rating. The fairly long-standing decline in emerging countries’ currencies also in part depressed the returns on emerging market bonds.
The return on government bonds was -2.5% (7.4%) and on corporate bonds 0.4% (6.9%). The duration of the loan portfolio was kept fairly short, at around 2.3 years, which dampened the impact of the interest rate movements on the result.
The return on loan receivables, 2.4% (2.6%), was strong in the low interest-rate environment. The amount of pension loans to Varma's customer loans continued to decline during 2015. The return on money-market investments was good in relation to the prevailing short-term interest rate level, standing at 0.5% (0.5%).
Interest rates in Europe have dropped to a very low level and were largely negative for government bonds. It will be challenging to achieve a positive real return on fixed-income investments in future. Interest income may also easily turn negative, should interest rates rise.