“The Head of Evernord Asset Management participated in the Business News Conference, where he shared his insights on the opportunities and risks of equities and bonds.

The Lithuanian bond market has seen a lot of activity in the last year and a half. The list of companies choosing to borrow in bonds rather than in banks has grown considerably and investors have had the opportunity to record double-digit annual returns on bonds. Gintaras Rutkauskas, Director of Evernord Asset Management, part of the Evernord Group of companies, says bonds should remain in investors’ sights for the foreseeable future as a potentially attractive asset class.

According to Rutkauskas, the upturn in the bond market is mainly due to a reduction in bank lending to corporates, especially from the real estate (RE) sector. As the European Central Bank (ECB) started to raise interest rates rapidly in mid-2022, the demand for real estate, especially office space, dropped and banks slowed down their lending to property developers. The latter soon found a solution and turned to bonds, i.e. decided to borrow directly from investors.

“A bond and a bank loan are very similar instruments, except that a bank lends as a single lender, whereas a bond borrows from many smaller lenders. It is possible that peer-to-peer lending platforms have also provided the impetus for the rise in bonds, as they have shown a very clear model of how lending works when a single entity borrows and there are many lenders,” Rutkauskas reflects. – Meanwhile, the bank plays the role of an intermediary between the business that wants to borrow and the depositor who has the funds.”

Message to investors: it’s not too late

What does the bond market look like from an investor’s point of view, now and in the near future?

“The lucky ones have already boarded the most attractive carriages of the bond train. Those who bought fixed-rate bonds can certainly be satisfied with their investment at the moment, as they have not only recorded attractive returns, but their own bonds are appreciating in value. It is important to remember that as interest rates fall, bonds become more expensive. This is exactly what is happening now, as the ECB is gradually lowering base rates and EURIBOR interbank rates are also falling at a similar pace,” notes the head of the asset management company.

He stresses that it is not too late to buy bonds in the near future: the long-term return on bonds is similar to that of equities, but the reliability is higher. Specific technical parameters such as volatility or drawdown, which refers to the reduction in the value of an investment portfolio from its relative peak to its relative trough, speak in favour of bonds. These are important parameters for investors to consider and bonds have historically been twice as low as equities.

“When a company is in bad shape, shareholders’ capital is used first and then it’s the turn of bonds. Bonds also come in several levels. Hybrid subordinated bonds, which are usually issued by banks, are inherently closer to equities than bonds and are riskier. Meanwhile, bonds with collateral are the best choice, such as the bonds distributed by Evernord to the Latvian company Marijas 2 SIA, which borrowed funds to invest in the construction of the Novira Plaza Riga business complex in Riga. In this case, all assets are pledged to all bondholders, so such bonds are the safest,” he says.

He adds that the attractiveness of the bonds is also enhanced by their liquidity – they can be transferred when funds are needed, or simply if there is no longer a need to hold such an investment.

Bonds from the real estate sector dominate

The fact that real estate dominates the distribution of bonds by sector in Lithuania is not a unique feature of Lithuania, according to the head of Evernord Asset Management. Bonds in this sector are also popular in Scandinavian countries, he says, and in general, the prevalence of this form of lending in different business sectors depends on the economic structure of a particular country.

“In Lithuania, real estate sector bonds really outweigh them, accounting for about half of all issues. Most of the rest is financial sector corporate bond issuance, with only a very small share going to other sectors. “In Evernord’s open-ended, high-yield Evernord Bond Fund, we aim to balance bonds by sector, based on the principle that no single sector should account for more than 15% of the fund. This allows for maximum diversification of risks, especially if we also spread the investment geographically. I have to admit that finding companies in other sectors that are willing to borrow bonds is a challenge,” says Rutkauskas, the fund manager.

For companies that have access to a bank, the process may seem easier, especially if it is not the first time borrowing. In the case of bonds, it is a different process, requiring compliance with the Bank of Lithuania’s requirements in preparing documentation and establishing successful cooperation relations with bond issuers and distributors. Entering the bond territory for the first time may seem like more effort, which still discourages some businesses from this borrowing route.

“However, if it is not the first time a company has issued a bond, and it knows what materials to prepare, everything goes smoothly and relatively quickly. Businesses that have issued their own debt during the recent surge in the bond market have seen this,” says Rutkauskas.

Trends: there are unknowns

Speaking about macroeconomic trends in the short term and their impact on the investment environment, the head of Evernord Asset Management stresses that interest rates are moving confidently in one direction – downwards. The only question is at what pace they will fall and at what threshold they will stop.

“Economists assume that the ECB’s base rates will stop at 2-2.25%, which is likely at the end of next year. The dynamics of EURIBOR are similar to those of the ECB, for example, base rates are now 3.5% and the 6-month EURIBOR rate is around 3% (mid-October data). This reflects the market’s expectation that the ECB will continue to cut interest rates in the near future,” Rutkauskas said.

According to him, the 2-2.25% interest rate threshold could be changed by factors that are currently unknown, such as oil appreciation. This could be caused by intensified tensions in the Middle East and the partial or total elimination of Iran from oil supply.

Rutkauskas suggests that stock and bond markets should be carefully evaluated when building investment portfolios. Stock prices are relatively high, while corporate bonds remain relatively cheap and their returns are still high.

In terms of sectors, interest rate sensitive businesses are worth looking at. The most prominent examples are real estate, energy generation and utility companies, which are heavily invested in equipment and infrastructure, resulting in high leverage and a significant interest cost component.

“As interest rates fall, the costs of these companies will fall and their performance will improve. So these sectors – real estate, utilities, some of the manufacturing segments that invest heavily – could be prioritised for investment. In any case, bonds remain a more attractive asset class than equities in the medium term,” says G. Rutkauskas, Head of Evernord Asset Management.

https://www.vz.lt/izvalgos-verslui-2025/2024/10/28/obligacijos-ar-ne-velu-investuoti