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, 2024, the two-year US Treasury yielded 4.875 per cent and the 10-year US Treasury yielded 4.48 per cent. Ten-year US Treasury yields have not exceeded 4 per cent since 2009. In other words, these yields are near 14-year highs. It is important to understand the investment opportunities that result from this. Most fixed income securities price based on a spread to the US Treasury. If US Treasury yields are near their 14-year highs, so are the yields on other fixed income securities. Investors should consider lengthening the duration of their investment portfolio, that is, purchasing longer dated bonds — and locking in these attractive yields for the next five to 10 years. It’s also important to note that investors can get more yield for less risk in the current environment.

Why Now?

The window of opportunity is short because yields will likely decline when the market believes the Federal Reserve is close to lowering rates. When will the Fed start lowering rates? That’s more difficult to say, but we know their criteria for lowering rates. A few data points help inform this judgment. For example, US inflation and growth cooled in April. The US Core PCE Index (personal consumption index) rose 0.2 per cent in April from the prior month. The year-on-year increase was 2.7 per cent. Both results were in line with expectations. Personal spending also increased by 0.2 per cent month on month; this was below the 0.3 per cent expected and below the 0.7 per cent out-turn of the previous month. The Federal Reserve is looking for more assurances that inflation is sustainably declining towards their 2 per cent target. This data release caused a brief rally in bond and stock markets.

Strategic Moves for Investors

To make the most of the current environment, investors should consider a few strategic moves:

1) Buying longer dated bonds, for example, five to10 years

2) Focusing on bonds from investment-grade rated issuers — potentially going further down the capital structure to get higher returns

3) To maximise returns on short-term investments, buy a one-year repo backed by high-quality collateral

4) Use global bonds to maximise liquidity and credit quality

The current high-interest rate environment presents a once-in-a-decade opportunity for investors. By strategically incorporating high-yielding fixed-income securities into their portfolios investors can lock in attractive returns.

Marian Ross-Ammar is vice-president, trading & investment at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm.

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