The (New) Best Practices for Fixed-Rate Investments
-
bookmark
-
print
A version of this article was published by the Christian Leadership Alliance.
Like all nonprofit organizations, faith-based institutions strive to maximize their investment returns with little or no risk. When we discuss portfolio composition with our clients, fixed-rate investments, such as money market funds, certificates of deposit (CDs) or even bonds, are often the favored ways to make their cash reserves and donations work harder.
Savvy investors know that laddering your fixed-rate maturities is a best practice to optimize returns and preserve liquidity while mitigating interest rate risk. In the current economic environment, the fundamentals of a sound laddering strategy have shifted.
Given the uncertainty about the interest rate outlook, it’s important for faith-based organizations to stay on top of their fixed-rate strategies by keeping the following steps in mind:
-
Lean on your financial partners to help you keep track of the prevailing interest-rate sentiment.
-
Map your organization’s spending priorities against fixed-rate maturities.
-
Be wary of the risks surrounding market turns.
-
Perform due diligence on the safety of your investments, such as those offered by nonbank financial institutions.
Adapting to New Realities
Fixed-income laddering involves purchasing several instruments with staggered maturities (one, three, and five years, for example). It’s based on the premise that the longer your money is invested, the higher the return. Typically, you would invest more in the longer-term investments, which normally offer a higher rate of return. This allows you to take advantage of the higher rates while preserving some short-term liquidity. It also reduces your exposure to interest rate risk because you can reinvest maturing bonds or CDs at higher rates.
But things have changed. While the Federal Reserve expects to start cutting interest rates this year, it hasn’t provided a timetable for when those cuts will begin (BMO’s economists currently expect the Fed to start cutting rates in the third quarter of 2024). Nonetheless, all indications point to rate cuts starting later and continuing at a slower pace than previously forecast.
Considering Strategy Shifts
Also, while the economy appears to have escaped a recession, the yield curve remains inverted—that is, long-term interest rates are lower than short-term rates. Historically, this has been a reliable indicator of a coming recession, and it’s one reason why the Fed hasn’t been in a hurry to start cutting rates.
For the organizations we serve, the current conditions mean you may need to consider adjusting your laddering strategy. That could mean keeping a higher-than-normal percentage in short duration instruments to take advantage of the higher yields on money market funds and short-term CDs.
Your strategy also involves asking yourself:
-
What are your known timeframes for your spending priorities?
-
Is there a significant outreach opportunity or an upcoming capital improvement project on the horizon?
Taking a Proactive Approach
Fixed-rate investments offer a low-risk method for generating returns. Though it doesn’t require day-to-day management, it’s not a set-it-and-forget-it strategy either, particularly when the rate outlook is unclear.
Of course, that doesn’t mean you should do a complete about-face on your fixed-rate strategy. Too many variables make it impossible to predict how the economy will perform within a certain timeframe.
That’s why conducting appropriate due diligence of your financial partners and engaging them in regular discussions can help ensure your organization’s investment and cash preservation objectives are aligned with your mission for both the short and long term. Ultimately, maximizing sound management of your liquidity and investments offers many benefits and can help increase your organization’s impact by providing significant additional resources for the mission.
Jeremy Moore
Managing Director, Head of Religious Institution Banking Group
423-599-0028
Jeremy has spent the last two decades serving the investment and financing needs of large communities of faith. His background and experience ensure a thorough unde…(..)
View Full Profile >A version of this article was published by the Christian Leadership Alliance.
Like all nonprofit organizations, faith-based institutions strive to maximize their investment returns with little or no risk. When we discuss portfolio composition with our clients, fixed-rate investments, such as money market funds, certificates of deposit (CDs) or even bonds, are often the favored ways to make their cash reserves and donations work harder.
Savvy investors know that laddering your fixed-rate maturities is a best practice to optimize returns and preserve liquidity while mitigating interest rate risk. In the current economic environment, the fundamentals of a sound laddering strategy have shifted.
Given the uncertainty about the interest rate outlook, it’s important for faith-based organizations to stay on top of their fixed-rate strategies by keeping the following steps in mind:
-
Lean on your financial partners to help you keep track of the prevailing interest-rate sentiment.
-
Map your organization’s spending priorities against fixed-rate maturities.
-
Be wary of the risks surrounding market turns.
-
Perform due diligence on the safety of your investments, such as those offered by nonbank financial institutions.
Adapting to New Realities
Fixed-income laddering involves purchasing several instruments with staggered maturities (one, three, and five years, for example). It’s based on the premise that the longer your money is invested, the higher the return. Typically, you would invest more in the longer-term investments, which normally offer a higher rate of return. This allows you to take advantage of the higher rates while preserving some short-term liquidity. It also reduces your exposure to interest rate risk because you can reinvest maturing bonds or CDs at higher rates.
But things have changed. While the Federal Reserve expects to start cutting interest rates this year, it hasn’t provided a timetable for when those cuts will begin (BMO’s economists currently expect the Fed to start cutting rates in the third quarter of 2024). Nonetheless, all indications point to rate cuts starting later and continuing at a slower pace than previously forecast.
Considering Strategy Shifts
Also, while the economy appears to have escaped a recession, the yield curve remains inverted—that is, long-term interest rates are lower than short-term rates. Historically, this has been a reliable indicator of a coming recession, and it’s one reason why the Fed hasn’t been in a hurry to start cutting rates.
For the organizations we serve, the current conditions mean you may need to consider adjusting your laddering strategy. That could mean keeping a higher-than-normal percentage in short duration instruments to take advantage of the higher yields on money market funds and short-term CDs.
Your strategy also involves asking yourself:
-
What are your known timeframes for your spending priorities?
-
Is there a significant outreach opportunity or an upcoming capital improvement project on the horizon?
Taking a Proactive Approach
Fixed-rate investments offer a low-risk method for generating returns. Though it doesn’t require day-to-day management, it’s not a set-it-and-forget-it strategy either, particularly when the rate outlook is unclear.
Of course, that doesn’t mean you should do a complete about-face on your fixed-rate strategy. Too many variables make it impossible to predict how the economy will perform within a certain timeframe.
That’s why conducting appropriate due diligence of your financial partners and engaging them in regular discussions can help ensure your organization’s investment and cash preservation objectives are aligned with your mission for both the short and long term. Ultimately, maximizing sound management of your liquidity and investments offers many benefits and can help increase your organization’s impact by providing significant additional resources for the mission.
What to Read Next.
Four Effective Ways to Optimize Your Treasury Operations
Oscar Johnson | April 08, 2024 | Manage Cash Flow
Contents Maximize operational efficiency Simplify where you can Make sure you’re protected Optimize the use of excess cash I…
Continue Reading>More Insights
Tell us three simple things to
customize your experience.
Commercial
Commercial
-
Who We Are
-
Industry Expertise
- Agribusiness & Protein
- Agriculture
- Dealer Finance
- Commercial Real Estate
- Correspondent Banking
- Educational Institutions
- Engineering & Construction
- Food & Beverage
- Franchise Finance
- Futures & Securities
- Governments
- Healthcare
- Manufacturing
- Metals
- Not-for-Profit Organizations
- Private Equity Sponsors
- Professional Services
- Retail & Wholesale Distribution
- Specialty Finance
- Trucking
- Dental Practices
- Fuel Services & Convenience
- Logistics, Rail and Shipping
- Technology Banking
- Wine & Spirits
- Religious Institution Banking
- We Can Help
-
Our Bankers
- Our Podcasts
Contact Us
Banking products are subject to approval and are provided in the United States by BMO Bank N.A. Member FDIC. BMO Commercial Bank is a trade name used in the United States by BMO Bank N.A. Member FDIC. BMO Sponsor Finance is a trade name used by BMO Financial Corp. and its affiliates.
Please note important disclosures for content produced by BMO Capital Markets. BMO Capital Markets Regulatory | BMOCMC Fixed Income Commentary Disclosure | BMOCMC FICC Macro Strategy Commentary Disclosure | Research Disclosure Statements.
BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Bank N.A. (member FDIC), Bank of Montreal Europe p.l.c., and Bank of Montreal (China) Co. Ltd, the institutional broker dealer business of BMO Capital Markets Corp. (Member FINRA and SIPC) and the agency broker dealer business of Clearpool Execution Services, LLC (Member FINRA and SIPC) in the U.S. , and the institutional broker dealer businesses of BMO Nesbitt Burns Inc. (Member Canadian Investment Regulatory Organization and Member Canadian Investor Protection Fund) in Canada and Asia, Bank of Montreal Europe p.l.c. (authorised and regulated by the Central Bank of Ireland) in Europe and BMO Capital Markets Limited (authorised and regulated by the Financial Conduct Authority) in the UK and Australia and carbon credit origination, sustainability advisory services and environmental solutions provided by Bank of Montreal, BMO Radicle Inc., and Carbon Farmers Australia Pty Ltd. (ACN 136 799 221 AFSL 430135) in Australia.
The material contained in articles posted on this website is intended as a general market commentary. The opinions, estimates and projections, if any, contained in these articles are those of the authors and may differ from those of other BMO Commercial Bank employees and affiliates. BMO Commercial Bank endeavors to ensure that the contents have been compiled or derived from sources that it believes to be reliable and which it believes contain information and opinions which are accurate and complete. However, the authors and BMO Commercial Bank take no responsibility for any errors or omissions and do not guarantee their accuracy or completeness. These articles are for informational purposes only.
This information is not intended to be tax or legal advice. This information cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. This information is being used to support the promotion or marketing of the planning strategies discussed herein. BMO Bank N.A. and its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors.
Third party web sites may have privacy and security policies different from BMO. Links to other web sites do not imply the endorsement or approval of such web sites. Please review the privacy and security policies of web sites reached through links from BMO web sites.
Notice to Customers
To help the government fight the funding of terrorism and money laundering activities, federal law (USA Patriot Act (Title III of Pub. L. 107 56 (signed into law October 26, 2001)) requires all financial organizations to obtain, verify and record information that identifies each person who opens an account. When you open an account, we will ask for your name, address, date of birth and other information that will allow us to identify you. We may also ask you to provide a copy of your driver's license or other identifying documents. For each business or entity that opens an account, we will ask for your name, address and other information that will allow us to identify the entity. We may also ask you to provide a copy of your certificate of incorporation (or similar document) or other identifying documents. The information you provide in this form may be used to perform a credit check and verify your identity by using internal sources and third-party vendors. If the requested information is not provided within 30 calendar days, the account will be subject to closure.