Fixed income investments for expats are finally an attractive option due to the rise in interest rates. After years of negligible returns, and 2022 being the worst year on record for bond funds, clients can finally generate good returns from low-risk assets. Within this blog, I will define fixed income, access the implications of the recent interest rate hikes on the market and note how this differs from general income investing and the options available to you.
What are fixed-income investments for expats?
Fixed income investments are financial instruments that provide investors with a fixed rate of return over a specified period of time. These investments typically include bonds, treasury bills / gilts , certificates of deposit (CDs), and other debt securities.
Bonds are the most common type of fixed income investment. When an investor buys a bond, they are essentially lending money to the bond issuer (usually a corporation or government) in exchange for regular interest payments and the return on their principal investment at maturity.
Treasury bills, (US) or GILTS (UK) are debt securities issued by the government. They typically have maturities of 1 – 2 years and are considered to be one of the safest investments available.
Certificates of deposit (CDs) are issued by banks and credit unions. They offer a fixed rate of return for a set period of time. The longer the term of the CD, the higher the interest rate will typically be.
Fixed income investments are generally considered to be less risky than equity investments, as the returns are fixed and predictable. However, they also tend to offer lower returns over the long term compared to stocks and other equity investments.
Interest Rate rise affects on Bond Yields
Bond yield is the return on investment that you can expect to receive from holding a bond. It is typically expressed as a percentage of the bond’s face value.
The yield on a bond is influenced by a variety of factors, including the creditworthiness of the bond issuer, the prevailing interest rates in the market, and the time to maturity of the bond. Bonds with higher credit ratings and longer maturities typically offer higher yields, while bonds with lower credit ratings and shorter maturities generally offer lower yields.
Up until 2022, Bond yields had been incredibly low as interest rates had been kept to a minimum since the financial crash of 2008. Bond rates are dictated by the interest rate set by Monetary policy, ie Bank of England, Federal Reserve, and European Central Bank.
However, in order to try and decrease the excessive inflation incurred from the end of 2021, central banks started to increase interest rates at an unprecedented pace. As the rates went from 0 – 5% over a 12 month period in the US, any new bond being issued, offers the higher interest rate.
As a result, you can currently obtain a Treasury Bill, issued by the US government, with a yield of 4.58% over a 12-month period. Seeing that the US has never defaulted on its debt, you can consider this return to be as close to risk free as possible.
How this differs from general income investing
Income investing is a strategy in which an investor seeks to generate a steady stream of income from their investment portfolio. This is usually achieved by investing in assets that generate regular income, such as dividend-paying stocks, bonds, and real estate investment trusts (REITs). The goal of income investing is to provide a steady and reliable source of income, rather than focusing on capital appreciation.
The key advantage of income investing is that it provides a predictable source of income, which can be especially important for retirees or investors who need regular cash flow from their investments. Income investing can also provide a degree of stability and protection against market volatility, as dividend-paying stocks and bonds tend to be less volatile than growth-oriented stocks.
However, income investing also has some disadvantages. For example, income-oriented investments can be vulnerable to changes in interest rates, which can affect bond prices and dividend yields. In addition, income investing can limit the potential for capital appreciation, which can be a disadvantage for investors who are looking to grow their wealth over the long term.
Overall, income investing can be a useful strategy for you if you are looking to generate a steady stream of income. However, it is important to carefully consider the risks and benefits of this approach, and to diversify your portfolio to manage risk and maximize returns. Unlike, the fixed income of Bonds, dividend paying stocks and REIT’s are higher risk and therefore have greater scope for volatility.
Fixed Income Funds
A fixed income fund is a type of investment fund that primarily invests in fixed income securities such as bonds, treasury bills, and other debt securities. The primary objective of a fixed income fund is to generate regular income for investors through the interest payments received from the underlying fixed income securities.
Fixed income funds are generally considered to be less risky than equity funds because the returns are relatively stable, and the principal investment amount is typically preserved. However, the returns from fixed income funds may not keep pace with inflation, and there is a risk of default by the issuer of the underlying securities.
Fixed income funds are typically managed by professional portfolio managers who invest in a diversified portfolio of fixed income securities to achieve the fund’s investment objectives. Investors can invest in fixed income funds either directly or through mutual funds, exchange-traded funds (ETFs), or closed-end funds.
Overall, fixed income funds can be a good choice for investors who are seeking regular income, capital preservation, and lower risk compared to equity investments. However, investors should carefully evaluate the risks associated with any investment before making a decision to invest.
Fixed income investments for expats
For an expat who wants to generate an income there are other considerations. These include currency, tax and investment products utilised. Whereas you can purchase an annuity with your pension if you reside in the UK, this option is removed upon relocating. As such, it is prudent to work backwards, starting with the amount that is required. From there, via your adviser, a portfolio can be put together to meet your income requirements.
This can be made up of fixed income funds along with dividends, REIT funds and capital growth. Usually combined with state pensions offering a guarantee, inflation linked income. By spreading the risk across different types of fixed income and asset class, plus guaranteed income sources, any volatility in markets can be mitigated over the duration of the investment.
It is important to note that fixed income investments carry some degree of risk. The returns may not be as high as those offered by other types of investments such as stocks. You should therefore consider your individual financial situation and goals before making any investment decisions. In conclusion, the market has significantly improved regarding fixed income investments for expats.
Please feel free to get in touch to discuss your personal position in greater detail. We can then run through the option available including how we work at Harrison Brook and the products available.