The Bond Maturity Crunch

Monday, December 24th, 2012

The Bond Maturity Crunch

In the months prior to the Global Financial Crisis fixed interest investors reveled in high interest rates offered by bank deposits, bonds and finance company debentures. Volatile equity markets were unattractive by comparison and money flowed out of managed funds and shares into what was perceived to be a safe, high yielding haven. Of course, the delight with finance company debentures soon turned to misery, but those who locked their money into long term bank deposits and bonds at that time have continued to enjoy high interest rates despite current market rates having fallen to historically low levels. Five years on, a crisis now looms for those investors. Many are retirees who depend on interest payments to supplement their pensions. Once these high-yielding bonds mature over the next year or two, funds will be reinvested at much lower rates, perhaps around half of what they are currently earning. The effect will be more pronounced for those investors who did not spread their maturities to prevent the crisis that results when all funds mature at a time when interest rates are low.

The options for investors coming out of high-yielding bonds are limited. Some investors with a high need for income are looking to equities with high dividend yields as an alternative to low-yielding fixed interest. This is a rational solution providing those investors don’t need access to their capital for some time. The reality is that when investment yields are low and your need for income is high, your standard of living can only be maintained if you are prepared to use up some of your capital. This is a sensible approach if investment capital is run down in a planned way with an eye on ensuring it will last until late in life. In the long term, yields will improve.

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