In order for a fixed income investor to get any decent returns in most fixed income markets, an investor will have to invest long term, typically for periods longer than five years. So given that an investor has to invest long term to get a decent rate of return, it brings the question as to what to do in the case of an emergency need for cash.

Cash is King

Now most investment and financial planning guidelines indicate that you should keep enough cash invested short term to cover at least six months worth of expenses, but what is your cash need is greater than that? The key here is to invest in fixed income securities that are marketable and easily transferable. That is these securities will have sufficient liquidity so that you can easily sell them to other parties to obtain cash.

Consider Interest Earned and Ease of Selling

On the international markets investing in investment grade securities that have tenures that are two years or less will give yields of one to two per cent. This type of return can possibly give a negative real return given that US rates of inflation are normally one to three per cent . On the local front repo rates range from as low as two per cent to nine per cent depending on the amount invested and the time that it is invested for (whether it be 30 days – 365 days). These rates of return can also give a negative real rate of return since Jamaican inflation rates have often averaged in the double digits on an annual basis.

So when buying fixed income securities it is important to note who are the major holders of these types of securities, how widely it is distributed and often it is traded this will give you an idea of how easy it will be to trade these securities in the event of an emergency. The Government of Jamaica US dollar denominated bonds are examples of bonds that have a reasonable amount of liquidity, whilst Government of Aruba Bonds are considered to be fairly illiquid, on the other end of the spectrum US government securities are considered to be extremely liquid.

Consider borrowing against your investment

An alternative to selling your fixed income investment would be to take a loan against your fixed income security. Now the decision to take a loan will mostly depend on where interest rates are currently and what direction they are going. Most financial institutions will give loans against fixed income investments. They typically will lend a percentage of the market value of the fixed income security, that percentage depending on the liquidity of the security and the volatility of the price movement of the security.

If interest rates are lower than when you bought your security, the market value of your security is likely to be greater, in this case it would be advisable to sell the security, that way you would realize a capital gain. If interest rates are higher it would be more advisable to take a loan, other factors to consider would be the length of time that you would want the loan as that would have bearing on the cost (interest ) that you would pay.

Bob Russell is the assistant vice president, structured finance at Mayberry Investments Limited. He can be contacted at bob.russell@mayberryinv.com.