The Hunt for Yields

As interest rates fluctuate or decline many investors often seek new products or consider restructuring their portfolio. Understandably declining rates can give rise to feelings of fear, anxiety or second guessing your investments. Investors who actively monitor their investments may become disenchanted with lower rates and begin to wonder what products they could take advantage of in their quest to have higher yields. There are many new issues in the market including local corporate and international bonds. Before taking the leap to restructure an investor should weigh the pros and cons of each new potential investment.

It is easy to be dazzled by high yields but all that glitters may not be gold. Investments with particularly high yields indicate a higher level of risk is involved. While the return may be understandably tempting one should always consider whether the associated risk matches your appetite. If you cannot bear the thought of or afford the loss, that higher yielding investment may not be the right one for you.

In the case of both locally issued bonds and global bonds, consider your source of information. Issues may be from companies that investors are familiar with and this familiarity may give the investor a false sense of security. Additionally, you may be inclined to follow the crowd if friends or family are investing. This willingness to go along with what is popular may lead you to overlook certain key considerations such as the credit worthiness of the issuer. Just because the issuer is known to you does not mean they are financially stable and able to pay off their debts. For example, a popular locally issued bond may look appealing but when compared to a bond issued on the international market, the issuer of the global bond may have a higher credit rating. Their financials may also be better and the size of the company significantly larger, indicating they have a lower risk of default and better ability to repay their debt. However, one difficulty with an international corporate bond is that the issuer may be unfamiliar to the investor and naturally this may lead to skepticism. This is where thorough research should be done before investing your funds.

In the quest for higher yields, when comparing local corporate bonds with global bonds another key element to consider is liquidity. Local bonds may not trade frequently, and you may be at the mercy of your broker to buy the bond from you if you don't hold until maturity. The price may also not reflect the true value of the bond because the broker may buy it back from you at a steep discount. Before purchasing a locally issued bond it would be wise to ask your advisor if the security has traded recently. Global bonds on the other hand trade on the international market so you would have a much larger pool of potential buyers.

The value of time should not be overlooked. An investor who holds shorter term instruments, for example repurchase agreements, can consider the tenor of his or her investment. Where possible, investigate if holding the instrument for a longer time period will afford you a higher rate. Depending on the type of investment, locking in for a longer time period could also protect you from fluctuation in yields.

Investing requires attention and you are not limited to one product. Carefully consider which investments would suit your portfolio. Speak with your advisor to help you avoid emotional investing or speculating on interest rates and remember to stick to the strategy that would best help you to achieve your financial goals.

Christine Rankine is the Manager -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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