The (New) Best Practices for Fixed-Rate Investments

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:

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  Lean on your financial partners to help you keep track of the prevailing interest-rate sentiment.

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  Map your organization’s spending priorities against fixed-rate maturities.

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  Be wary of the risks surrounding market turns.

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  Perform due diligence on the safety of your investments, such as those offered by nonbank financial institutions.

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.

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:

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  What are your known timeframes for your spending priorities?

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  Is there a significant outreach opportunity or an upcoming capital improvement project on the horizon?

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.