"The changes facilitate more flexible investment of the Bank of Lithuania's financial assets, wider diversification of investment risk, and seeking of higher long term return," says Tomas Garbaravicius, member of the Board of the Bank of Lithuania.
Once Lithuania joined the euro area, the main objectives of the Bank of Lithuania's financial assets are primarily to contribute to the stability in the financial systems of Lithuania and of the euro area, to ensure the financial independence of the Bank of Lithuania, and to provide preconditions for the country to more easily withstand economic and financial shocks. Therefore, the updated financial assets management policy has retained the safety principle, which is prioritized with respect to the other two – liquidity and profitability – principles, even though the liquidity principle is no longer unambiguously more significant than seeking of profitability. Thus, the Bank of Lithuania's financial assets will continue to be invested in debt securities of investment grade, while investments will remain sufficiently liquid.
In addition, with a decrease in high-grade bond yields, the investment risk is further diversified – investments in wider range of asset classes and regions are being made and the share of unhedged US dollar investments is increased. For example, a small share of the portfolio (5%) is invested in US government bonds, currency risk unhedged while the euro area government bonds allocation is reduced to 10%.
The portfolio now also includes the investment in on-shore Chinese government bonds, which has been started last year. The gradual increase in allocations to quasi-government bonds, corporate bonds and global equities that has started in 2013 will be continued until the allocations reach 12, 8 and 5.6% respectively.
According to Garbaravicius, in an environment of low interest rates, the yields of highly secure and liquid bonds is close to zero or even negative thus it will be increasingly challenging to achieve positive returns in the coming years. The risk of the short-term investment losses has increased, especially due to a likely fall in the value of bonds, which account for most of the portfolio, if the interest rates rise; however, the changes are meant to improve the diversification and help to increase the return on investment in the long term.
