Finding a Home for Your Funds

We are now officially in the last quarter of the year, and some would say time flies when you are having fun. Although, many fixed income investors would probably beg to differ and say the last two years were not fun due to market volatility. How quickly we forget the opportunities the volatility presented!

The Federal Reserve hiked its benchmark interest rate 11 times between March 2022 and July 2023, held them steady at a historic high for more than a year and finally announced rate cuts in September of this year. As we approach the end of 2024, now would be an ideal time for investors to begin to review their portfolios and reassess the strategies that may or may not have worked and discuss with their financial advisors the best way forward.

One key element that investors should review, is all upcoming maturities in their portfolios for the next 6 months. With the recent rate cut the investment landscape has changed, and investors may be challenged to find optimal replacements. For example, many local investors hold NROCC (National Road Operation and Construction Company Ltd.) 9.375% bond which matures in November. These investors would have received 50% of principal in 2023. At that point yields and coupons were at an all-time high so investors would have had the option to reinvest at an equal or even higher coupon and yield for the medium to long term. These same investors a mere year later will be hard pressed to replicate their previous yield.

Investors must now be realistic when assessing their portfolios. When making a reinvestment decision, compare your new options to the previous investment by analyzing both the risk and the returns (interest rate). By only looking at the interest rates, you may be investing in an instrument which is outside your risk appetite. Investors will have to decide if they will accept a lower interest rate or take on additional risk. If you require the same level of income you may have to accept greater risk and/or be willing to pay a premium for an existing high coupon bond. Bonds with higher coupons have seen a significant rally in prices with the official cut in interest rates by the Federal Reserve.

Time should also be a factor when analyzing your options with your licensed financial advisor. Recall that placing funds on short term instruments will extend your exposure to reinvestment risk. The yields available when these shorter dated securities mature, could be lower than those available today. Remaining in short term instruments may result in you foregoing substantial returns over the medium to long term. When reinvesting for income it may be wise to purchase longer duration securities. This will facilitate you being locked in at the current higher rates as interest rates will continue to decline in 2025.

As you review your portfolio for the last quarter, always seek the help of your licensed financial advisor. Use this time as an opportunity to reassess your investment strategy, ensuring you are still on track to meeting your financial goals. Evaluate your portfolio, especially any upcoming callable or maturing instruments. Speak with them about how to appropriately diversify and structure your portfolio while keeping abreast of current market conditions. By actively managing your portfolio and being proactive investors can make the best decision for themselves and build a profitable risk adjusted portfolio.

Christine Rankine is Assistant Vice-President -Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm

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