How can a “start-up” coach YOU on mitigating risks in the bond market?

BPV tool
How can a “start-up” coach YOU on mitigating risks in the bond market?

There is a notion that bonds are the safest and low-risk investment option, as compared to the highly volatile stocks. This may be true to some extent, but there are some risks that investors tend to forget and consider before making their investment decisions.

In this article, we will see how the startup company PFITR, has made it its mission to improve the fixed income investment practices by creating a solution that exposes risks and coaches you on how to manage these unavoidable risks in the bond market… besides giving its customers access to all of the bond market prices. Now, since there are around 11 risks which are mostly ignored by fiduciaries, or they just do not acknowledge what they represent for the safety of their portfolio, we are taking advantage of this blog to individually focus on each one of them.

So, we will not go into detail about how bonds work, and we have decided to dedicate this specific post to analyze the basic information on just three particular risks, which are unanticipated, slightly similar and interconnected. We will talk about another group of risks in future blog posts, just as we did for discussing Interest Rate Risk back on April19th.

And finally, we are going to let you know how technology and the expertise of a team that conform a startup, are about to help the investors, fiduciaries and treasury professionals with the power of information compiled into one software solution that helps mitigate risks.

For now, let us focus on:

  1. 1. Event risk.
  2. 2. Inflation risk.
  3. 3. Liquidity risk.

Event risk: This is the risk where the ability of an issuer to make interest payments and the principal amount is declined because of an unpredictable occurrence which will cause a substantial decline in the market value of a security, affecting the entire bond market.

These unpredictable occurrences can be:

  1. 1. A natural disaster: A catastrophe such as an earthquake, a flood or a fire that causes human losses and/or a significant economic expense due to the damages.
  2. 2. Mergers and acquisitions: In such events, the company may face rating downgrade and a possible negative outcome due to organizational changes.
  3. 3. Regulatory changes: These include impositions of a new tax, regulations and governmental laws.

These unexpected and unanticipated event risks are hard to control and may or may not be under management control and influence the performance of a company’s investments. For example: natural disasters will affect the ability of making payments by causing downgrade in credit rating; mergers & acquisitions increases the company’s overall debt burden and may force to take new or additional debt that may be too hard for them to make their payments of interest and principal; regulatory changes will mostly affect several industries and a new law could require companies and other organizations to make substantial and costly changes in its business model and on their investment portfolio policies.

Inflation risk: When there is an inflation in the economy, the real rate of return on your investments and the value of your portfolio will be lower. The cash value will be reduced due to the negative changes in the economy.

For example: If you buy a 10-year bond with a coupon of 5% and inflation is at around 8%, then the purchasing power of your bond interest will decline when adjusted for inflation. You may still get your principal at maturity, but it will be worthless.

Inflation should be a risk that is always taken in account, because any change in world economics and politics will probably result in a temporary or long inflation, which decreases the value of what investors might think is their fixed income securities. The sooner the risk of inflation is considered, the greater flexibility to manage it. There is even the inflation-adjusted annuities, that are US inflation-adjusted bonds called Treasury Inflation-Protected Securities or “TIPS”.

Liquidity risk: The risk of few buyers and sellers to sell out bonds (excluding government and corporate bonds).

This type of risk arises when an individual or a business entity need immediate cash requirements but are unable to trade or sell at market value even by holding a valuable asset. Mainly because of a fewer number of buyers or due to market conditions where it becomes difficult to bring buyers and sellers together.

All of the above risks are difficult to anticipate and may have a negative impact on bondholders, especially when these are not taken into consideration. But this is where the role of PFITR comes into play. This software-as-a-service (SaaS) technology company, which seeks to empower bond investors and agents to be better stewards of their portfolio, wants to give its users all of the historical and up-to date data they need to protect themselves from those type of risks, before making an investment.

How?

By giving you access, through a user-friendly tool, to unbiased current market data like historical pricing, Yield To Maturity (YTM), transparent bond prices, and other analytics of the whole bond market menu, required to make better informed investment decisions. Since you should look to protect your portfolio from unexpected happenings such as an inflation in the economy, a crisis, regulatory changes, etc., you must have a diverse portfolio, purchase bonds at the right time and make your investment decisions based on  data that allows you to consider your options to safeguard your money in case the worst happens, by knowing all of the different types of fixed income securities available to identify what best suits your investment policy and possibly increase the yield of your portfolio. The principle of safety is about not losing it all by putting all your money in one type of investment exposed to risks that were not considered when making your fixed income investment decisions, and by having access to true-value market information.

This is now possible thanks to Jim Koetting (founder and CEO of PFITR), and his initiative of starting to disrupt the bond market practices by empowering the investors with data. With nearly 20 years of experience in public funds management, he trained many fiduciaries and worked with thousands of entities in public fund management. He is highly recognized in the world of public funds investing, contributed over a decade of experience as a registered representative in the securities industry, a registered principle, and is a past owner of an investment advisory firm called PFI Strategies, certified public funds investment manager; educator and critically acclaimed author, who is well aware of every nook and corner of the bond market investments.

Because the risks that have been discussed on this post, are highly unpredictable and hard to measure, it is always advisable to equip yourself with this kind of tools that help you analyze past trends and diversify your portfolio.

The practice of diversifying your portfolio by investing in different types of bonds, short term, and long term, help reduce the volatility of your investments over time. This does not mean diversification will ensure a profit or guarantee against loss. The primary goal of diversification is not just to maximize returns; it is to limit the impact of volatility on a portfolio.

PFITR helps investors to optimize investment purchases by educating and empowering them with knowledge and technology, to bring transparency and efficiency to the bond market.

PFITR’s coaching and online solution

As there was a lack of transparency and unbiased information in the bond market, PFITR developed its flagship product “Bond Price Validation tool” with licensed proprietary data that allows fiduciaries optimally analyze fit, timing and price for their investment purchases. With transparent data.

The aim is to use knowledge and technology to make sure that the users improve their fixed income portfolio returns. While keeping up to date with what is happening in the market and best practices for them to execute.

With the help of proper coaching along with user-friendly tools, fiduciaries and treasury professionals can obviously make better-informed investment decisions, mitigating risk and keeping their portfolios safer.

For more information about how it works, visit PFITR’s online Bond Price Validation solution at https://pfitr.com/why-pfitr/

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