Last week my colleague Dwayne shared with readers the importance of financial agility, especially in volatile markets. An investor may wonder if they should change course and if there are truly opportunities out there when market conditions appear to be declining rapidly? While every investor is different, the general answer is yes there are opportunities.
There is no doubt that financial markets and the world at large, have been experiencing unprecedented times in the past few years. Financial markets have been affected in recent times by a multitude of factors including a global pandemic, war, and rising inflation. Many of us as investors may have been affected at one time or another by only one of these factors but have never experienced the combined effect of all these factors at play simultaneously.
On Wednesday June 14th the U.S. central bank (Federal Reserve aka the “Fed”) delivered its biggest rate hike since 1994. The Fed increased its benchmark rate by 75 basis points (bps) or 0.75%. The drastic action by the Fed was however not surprising. Many financial market participants expected the out-sized rate adjustment and in fact encouraged the Fed to “go big or go home” to restore its credibility in the fight against inflation which hit a fresh 40-year high in May despite earlier Fed rate hikes.
You may be wondering how an interest rate could be negative. So, let's take a brief look at "negative interest rates". Firstly, what are they? As the name suggests, the rate is literally negative, i.e., it is below zero. In essence, this means that it costs you to keep your money at the bank, and in effect, your cash deposit incurs a storage charge, rather than interest income.
If you think a barbell is just a tool for building muscles, think again. Barbell also refers to a strategy that bond investors can exercise (pun intended) to protect their portfolios from the effects of interest rates and potentially improve their returns.
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 12th 2022 (or 107.563 for investors responding and agreeing to the tender by May 10th). 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.
