Rising interest rates have caused bond prices to decrease and bond yields to increase. Consequently, investors are faced with the decision of investing in longer dated bonds or shorter dated bonds which will mature soon and can be reinvested at higher rates. The global bond market may appear complex, but it is driven by risk and return trade-offs like the stock market. To navigate this seemingly complex world of bonds, an investor should try to understand the following features before investing. 

Earlier this month, Heritage Petroleum (Formerly known as Trinidad Petroleum Holdings Limited “TPHLTT”) announced it would offer to repurchase its 9.75% 2026 bond from investors at a price of 102.563 on May 12^th 2022 (or 107.563 for investors responding and agreeing to the tender by May 10^th). This means that in addition to the interest earned for the period, bondholders will receive US$107.563 for every US$100 of face value invested. Investors loved the high coupon and the quarterly payments of this bond. What options are available to you now?

Inflation is a word we often hear in the news and during budget speeches. Inflation refers to the sustained increase in prices of goods and services in an economy or the increase in the cost of living over time. Many people may understand the concept and know what inflation is but may not truly grasp how inflation affects their investments.

A few weeks ago, we looked at the effect of the Russia-Ukraine war (and other factors) on interest rates and market volatility. As the war continues, sanctions have been imposed and governments now have to decide how to move forward. Since then, actions have been taken by various governments to protect their economies and the value of their currencies. The Russian government recently announced its new requirement that the sale of gas to “unfriendly” countries be settled in Russia’s official currency- the ruble or rouble. 

Bond prices (like equities) have declined appreciably in 2022 so far in response to sharp increases in interest rates as central banks, particularly the U.S. Federal Reserve Bank (Fed), deploy “artillery” to wage war against inflation which has been exacerbated by the ongoing Russia-Ukraine conflict. Already in the four completed months of 2022, the benchmark U.S. 10-year treasury yield, for instance, has more than doubled its increase recorded in 2021.

Last week we discussed the Ostrich and Meerkat Effects. The Ostrich Effect refers to the idea that some investors metaphorically bury their heads in the sand to ignore or avoid negative news while the Meerkat Effect describes investors who display the opposite behavior. When faced with a crisis, such as a market crash, ostrich investors prefer to avoid the news while meerkats become hypervigilant- obsessively looking for news and information.

Close your eyes and imagine an ostrich. One of two images will most likely come to your mind- either an ostrich running (they are known for their speed after all) or an ostrich with its head buried in the sand. Interestingly when I was doing research for this article, I found out that the idea that ostriches stick their head in the sand to avoid predators is a myth. It seems ostriches stick their heads in the ground to dig a shallow hole, where they can subsequently make their nests. They do not do it to hide or when they are scared.

Red flags are traditionally used to signal danger. There are many red flags waving in front of us in our everyday life that we often ignore. This can be detrimental to our health and wealth such as when we feel unwell physically and ignore the signs of illness (red flags) to our peril, instead ending up at the doctor’s office where we are told to make significant lifestyle changes because if we do not, we may get gravely ill or die. Today we are looking at the red flags of investing.

Too good to be true

Problem description: Higher interest rates have negative implications for many asset classes, not just fixed income assets. Higher interest rates translate to lower equity valuations (and thus less “price appreciation” potential). Higher interest rates also increase the cost of debt for corporations. Higher interest expense = lower profit = potentially lower dividends to shareholders. Mortgage financing gets more expensive and thus housing becomes less affordable.