Many investors have been surprised by the loss of money deposited in fixed income funds due to the economic climate. In fact, in 2022 they experienced the worst year in their history. The drop in its profitability reached 8% on average during that year, according to the director of studies of the Inverco Observatory, José Luis Manrique. They also went down at the same time as the stock market, which has only happened three times since 1950. And it’s no small evil, considering that the Spanish have 101 billion euros in these funds, mostly long-term . So why are they making losses while investing in fixed income bonds are so attractive?
In these extraordinary circumstances, the erroneous belief that investing in fixed income is risk-free comes to light. “It is believed to have a fixed rate of return but it is really just a play on words,” explains Javier Santacruz, vice-president of the AEPF.
The main reason for the drop in prices lies in the tightening of monetary policies by central banks to contain inflation, which keeps interest rates steadily rising. Last March 16, it was the European Central Bank (ECB) that made the latest increase – the sixth in a row – to 3.5%, after a decade of exception with negative rates. And this directly affects the profit that can be obtained from the bonds invested in earlier in the rise.
Adrià Morron, economist at CaixaBank Research, explains that this happens because there is an inverse relationship between the price of a bond and its interest rate, which implies that, when rates rise, the price of bonds falls and those that have them in your wallet lose value. “This is due to the fact that bonds with the same characteristics as those already issued could be issued at a better rate, which causes the price of those that already existed to fall”, says an investment expert from one of the main banks in Spain. But these effects on fixed income funds have not slowed down investment. In the last year, they have had an increase of almost 6,000 million euros deposited.
In short, fixed income is not fixed, but Treasury bills are an exception. The higher the rates, the more profit you get. And these are giving joys to investors with a return greater than 3%.
The funds that have performed better in these times are Spanish and Italian public debt, bonds with higher credit quality and corporate debt, according to experts. “Also the funds that are linked to the dollar”, says Víctor Álvargonzalez, an expert at the independent financial advisory firm Nextep Finance.
But the rate hike does not affect the new participants, quite the opposite. “Those who take advantage of the rate hike to buy fixed-income funds will be the ones who will see a more positive return because little by little they will recover their losses,” adds Manrique. In fact, in the first two months of the year there has been a recovery of 0.3% of this profitability.
Bounce opportunity
Experts point out that it was foreseeable that at some point a monetary correction would come, the result of many years of negative rates, but what could not be calculated was the virulence. Those who could not see it coming are advised to get advice from advisors and wait until the losses are recovered, without abandoning their position. “When all the losses have already occurred, it’s never a good idea to leave, because you lose the opportunity to retaliate”, adds Santacruz.
Rodrigo Buenaventura, president of the National Securities Market Commission (CNMV), warned this same month that “the price of fixed income instruments, as much as it might seem to unsophisticated investors, is not fixed and even less so in products with horizons long periods and at a time of expectations of an increase in interest rate curves”.