As the Federal Reserve moves closer to initiating a rate-cutting cycle, bond investors are reassessing their strategies. The Fed’s decision to hold rates steady in July was widely expected, but what caught the market’s attention was the growing possibility of rate cuts in the coming months. The July employment report, which showed a surprising rise in unemployment and a weak jobs growth, has amplified concerns that the Fed may be falling behind in addressing emerging economic weakness.

Adding bonds consistently to your portfolio is a way to prepare yourself for retirement as bonds provide a steady source of income. A type of bond that you should consider adding to your bond portfolio is a Contingent Convertible Bond (CoCo) because they typically offer higher coupons (income) than other bonds. CoCos are complex financial instruments with unique characteristics and special terms and conditions that differentiate them from traditional bonds, offering both potential benefits and risks to investors.

In the dynamic realm of global finance, where change is the only constant and complexity reigns, the investment landscape is shaped by a convergence of economic, technological, and geopolitical forces. These factors intertwine to shape market sentiment and drive strategic investment decisions. In this edition of the Sterling Report, we examine these factors and potential ways to navigate this varied terrain.

Pros and Cons of higher interest rates: The past two years of high interest rates have had negative implications for many asset classes and inversely, presented many buying opportunities for investors. Locally, higher interest rates (and the tight Jamaican dollar liquidity conditions) translated to lower local equity valuations (and thus less “upside” potential). Higher interest rates also increased the cost of debt for corporations and lowered dividend payouts to shareholders.

Just as hurricane season acts as a reminder of the need to protect our homes from turbulent weather, each year investors face a familiar challenge: how to protect their portfolios amidst potential financial storms. Much like preparing for severe weather, smart investing involves fortifying your financial strategy to withstand market volatility. Bonds, which can be compared to sturdy structures in a storm, play a crucial role in this defence.

Fear of Missing Out commonly called FOMO is a slang term generally used to describe the emotion and distress persons feel when they miss out on experiences that others may be having. This feeling tends to arise especially when what is being missed is perceived as an enjoyable or memorable activity. In the realm of investing, emotions can often play a significant role in decision-making, and Fear of Missing Out (FOMO) is one of the most powerful forces that financial advisors often observe in clients. FOMO combined with market hype can have profound effects on fixed income investors.

In last week’s article, Eugene spoke about the Federal Reserve's recent decision to maintain its benchmark interest rate and reduce interest rate cut forecasts for this year. But what does this mean for investors and global bond holders?

For the remainder of 2024, the global bond market is set for a potential shift as the Federal Reserve and central banks around the world are now expected to make fewer interest rate cuts than previously anticipated. While some investors may see this as a cause for concern, there are numerous positive effects that could come from this change.

In the wake of the Federal Reserve's recent decision to maintain its benchmark interest rate at a two-decade high of 5.25% to 5.5% and reduce rate cut forecasts for this year, the path to policy normalization in the United States remains fraught with uncertainty. The decision, reached by Fed officials, signals a cautious approach to interest rate cuts in 2024, forecasting just one reduction compared to the three cuts anticipated earlier this year. The Fed's projections extend into 2025, where four cuts are now expected, one more than previously outlined.

Invest in local currency and earn foreign currency? What sorcery is this?! Investing in assets that pay interest in a stronger currency while the principal investment is in a weaker or more volatile currency can be an effective investment strategy to hedge against devaluation risks- no sorcery or magic involved. This approach not only helps protect the investor's capital but also ensures that the returns are preserved in a more stable or appreciating currency.

The “Higher interest rates for longer” phenomenon in the US has created a brief window of opportunity for investors to lock in attractive yields that will outlast the current cycle. Investors can enjoy higher returns even when interest rates decline. On Friday May 31^st, 2024, the 2-year US Treasury yielded 4.875% and the 10-year US Treasury yielded 4.48%. 10-year US Treasury yields have not exceeded 4% since 2009. In other words, these yields are near 14-year highs. It is important to understand the investment opportunities that result from this.