Skittish bond market, forex losses dampen Sterling’s performance
Despite steady interest income from its holdings, the volatility in financial and foreign exchange markets put a damper on Sterling Investments’ earnings in the March quarter, erasing a third of its bottom line.
The boutique investment company deals primarily in fixed-income investments across the globe, particularly US bonds. Predictable skittishness arising from talk and later action on the part of the Federal Reserve, the United States’ central bank, in raising interest rates, has spurred contraction in the bond market, said Charles Ross, CEO of Sterling Investments Limited.
The tightening by the Fed, he added, has resulted in market declines for both stocks and bonds, especially since the first quarter of this year.
“Even before the Fed got moving with their increase in interest rates, the markets had already priced in about a year’s worth of rate increases,” Ross said.
Sterling Investment’s quarterly profit fell from $55 million last year to $36 million in the current period. The main contributor to the decline related to foreign exchange, which spun from a translation gain of $28 million to a loss of $8 million. But, Sterling also reported a steep decline in the gains from the sale of investment securities, from $17 million to $5 million.
On the upside, interest income improved from $35 million to nearly $40 million.
The company, whose 1,100 shareholders include pension funds and other long-term investors, is assuring them of returns via dividend payments, notwithstanding its shrunken bottom line.
“Shareholders are somewhat not so badly affected, in that SIL pays dividends on realised gains,” said Vice-President Marion Ross, daughter of the CEO.
Additionally, the bond trading company is on the lookout for bargain buys as part of its loss mitigation efforts.
At mid-week, bond yields on the 10-year US Treasury fell to 2.88 per cent, from 2.97 per cent on Tuesday, as investors shifted money into lower-risk investments. Earlier in May, the 10-year had risen above 3.2 per cent. Yields typically fall when bond prices rise, and vice versa.
“Interest rates are expected to rise significantly over the next few months, and the market prices for many financial assets are likely to decline. This will create buying opportunities for investors and the company. SIL thrives in times of crisis and we’re cautiously assessing the market for undervalued investments,” said Marion Ross.
“What it means is that this is really not a good time to sell. Indeed, it’s already a buyers’ market, but in the next six or 12 months or so we will begin to see the real buying opportunities,” added Charles Ross, noting that the Fed is expected to continue raising interest rates, and that even just the expectation of a recession may prompt a sell-off, which would lead to bargains for buyers.
Sterling will be relying on margin loans from brokers to fund the purchase of securities, as well as its own short-term investment instruments that are soon to mature.
“The good thing about that, is that cash will be coming in from those securities during that period; and because the bonds are short in duration, or near maturity, there’s little price risk in relation to holding those positions,” CEO Ross said.