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Fixed income opportunities during times of rising interest rates

Oct 10, 2023 | RBC Wealth Management


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Rising interest rates may have created new opportunities for fixed income investing. Learn more in the new issue of Investor’s Edge.

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More than a year after the Federal Reserve began bumping interest rates to slow inflation, fixed income investments may deserve a fresh look from investors who are looking for a low-risk strategy in markets that are continuing to act a little unsettled. Fixed income securities often help provide a good balance within an investment portfolio, as fixed schedules of payments from these investments vary from both long-term and short-term investing opportunities.

At RBC Wealth Management, a team of knowledgeable professionals in the fixed income trading and strategies teams work with your financial advisor on your fixed income investing approach. These teams provide investors with an extensive, competitive selection of fixed income investments, customized to address your unique needs and goals.

Floating Rate Notes

Floating Rate Notes (FRNs) are in demand among investors when it is expected that interest rates will increase. These are fixed income securities where the interest rate is tied to a short-term benchmark rate like the Treasury rate, the Fed funds rate or even Secured Overnight Financing Rate (SOFR). As those rates adjust, so will the interest payments. 

FRNs present risk if interest rates decrease, which would result in lower coupon payments. The Federal Reserve has two more meetings scheduled through the end of this year, providing the potential for interest rate changes. All payments on FRNs are subject to the creditworthiness of the issuer.

Balancing with a fixed income ladder

Investors can build a fixed income ladder by purchasing fixed income securities—such as corporate bonds, U.S. agency and Treasury securities, municipal bonds and certificates of deposit—in staggered maturities (one-year, two-year, three-year, five-year, etc.). The goal of building a ladder is to strategize that a portion of the portfolio matures at regular intervals, making it available for reinvestment at variable times. 

Investors could benefit from any increase in interest rates by reinvesting proceeds from maturing bonds or other securities at the higher rate. And if interest rates should fall, bonds at higher rates may be still in place. Typically, longer-term vehicles pay higher rates than short-term ones do. 

If you think interest rates will continue to rise, you could shorten the sequential maturity intervals to allow for more frequent reinvestment. Conversely, if you are of the opinion that interest rates are going to be reduced in future Federal Reserve meetings, investing in additional longer-term maturities would be an option to investigate. 

Work with your financial advisor to determine the best laddering or FRN strategies for your portfolio, especially as the Federal Reserve may be ending its long rate hiking cycle.

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