Page 37 - August 22, 2024 Bulletin

held for the entire 10-year period, the yield will not change. approach is to participate in the market as liquidity allows
However, the unrealized gain or loss (value) will fluctuate by deploying excess liquidity through a well-thought-out
based on the movement of market rates. Understanding this investment strategy. The investor should think about “time
dynamic in fixed income investing is important, especially in the market” and not “timing the market.” It’s easy to
in times when the inverted yield curve is tricking you to think you missed the peak in rates and not take any action.
keeping a lot of your dollars in the shorter part of the curve. Market interest rates, like the treasury markets, tend to lead
Late cycle investing typically involves moving towards the Fed Funds Rate both up and down.
protecting the yield or income of the portfolio versus the
value of the portfolio. As we head towards an upcoming easing cycle from the Fed, we
should be ever mindful that we do not have the crystal ball when
4. There are good ways and bad ways to extend duration. it comes to predicting interest rates. Instead, we should stick to
Traditional late cycle fixed income investment strategies our written investment strategy of building a portfolio of bonds
typically involve some level of extension of duration to with stable and predictable cash flows to complement our entire
ensure the “locking” in of yield over a longer period. balance sheet. Utilize the words of wisdom in this article to
Extending duration needs to be done in a prudent manner ensure we can build a higher performing portfolio at start of this
with bonds that have some level of call or prepayment next rate cycle.
protection. Sacrificing structure for extra yield is not a
strategy that typically ends well. The bonds that provide less Dale Sheller is an Associate Partner and the Director of
call or prepayment protection are typically going to yield Financial Strategies Group at The Baker Group. He joined the
more than those that provide adequate call or prepayment firm in 2015 after spending six years as a bank examiner with
protection. As portfolio managers look to extend duration the Federal Deposit Insurance Corporation. Sheller holds a
to protect future yields, they must do so in a prudent bachelor’s degree in finance and a master’s degree in business
administration from Oklahoma State University. He works
manner. with clients on investment portfolio strategies, interest rate risk
management, liquidity risk management, and regulatory issues.
5. Waiting for where rates used to be can cost you. Trying Sheller regularly speaks at educational seminars nationwide
to buy bonds at or near the peak in the rate cycle is a and serves as a faculty member for multiple banking schools.
challenging and usually impossible task. However, a better Contact: 800-937-2257, DSheller@GoBaker.com.

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