The paradox of fixed income funds: rates rise but profitability falls

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Oliver Thansan
Oliver Thansan
12 March 2023 Sunday 23:40
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The paradox of fixed income funds: rates rise but profitability falls

C. E. was 84 years old when in 2019 Ibercaja offered him to increase his participation in a fixed-income fund to make his savings profitable at a time when term deposits did not exist. Four years later, the octogenarian has realized that not only has she not earned a single euro with the product, but she has also lost more than 8% accumulated.

How is it possible that when savers queue up at the Bank of Spain to buy fixed income (bills), the fixed income fund has losses? "When we talk about a fixed-income fund, one of the fundamental risks we face is that of interest rates," Ibercaja sources respond. From the bank they add that “fixed income has been affected because its operation is inverse to the profitability that can be obtained with the new issues. That is to say, when the rates rise, the price of the bonds falls and those who have those bonds in fixed income lose value”.

The loss of value situation is extensible to all financial entities. The data published by Inverco reveal that in 2022 the profitability of long-term fixed-income investment funds was -8.13%. Inverco's director of studies, José Luis Manrique, warns that "fixed income is as variable as variable income." Sometimes clients who are not well advised may think that a fund that is classified as fixed income cannot generate losses. But it's not like that. Not much less. Inverco data from recent years shows that long-term fixed-income funds were not a good investment, not only in 2022 but also in previous years. In the last three years the losses were 2.4% per year and if you look at a period of five years, they accumulate annual decreases of 1.25%. But that of 2022 was the biggest drop in recent years.

Antonio Sáiz, director of Savings and Investment at Banc Sabadell, says that “in 2022 a very rare phenomenon occurred that has only happened three times in the last 70 years. Variable income fell and also fixed income ”. The banker explains that "with the change in expectations about central banks, fixed-income funds accelerated the bad behavior that began since the beginning of 2022."

Another investment manager from one of the main Spanish banks explains in a simple way how a fixed income fund works when rates rise: “If a fixed income fund only had a Treasury bill bought a year ago with a return of 1% and now the bills give returns of 3%, the fund's valuation falls, which generates losses for the participants”.

As in many other cases, the banker details that in this situation "those who lose are the clients who already had positions in the fund before the fall, while the winners are those who now enter that vehicle that is at very high levels." low". What is expected is that these fixed income funds will gradually recover the losses because their managers should start buying fixed income now issued with higher yields.

Precisely for this reason, a few months ago banks began to offer fixed-income funds (some guaranteed) that give returns of 2%. Although the bankers consulted remember that, except for those guaranteed, in the rest you can always lose money.

This has led to the fact that in recent months, the National Securities Market Commission (CNMV) has asked investors in fixed-income products to be cautious. This same week, the president of the CNMV, Rodrigo Buenaventura, pointed out that "the price of fixed-income instruments, as much as it may seem to inexperienced investors, is not fixed, and even less so in products with long time horizons and in a moment of expectations of an increase in the interest rate curves”. That is why he recommends that buyers of products such as fixed-income funds "assess the risks if rates rise further and be aware of the real (probably negative) return that the product offers."