Fixed Income Research in a Low-Interest-Rate Environment

Fixed-income research is essential for investment banks, asset managers, and related entities. These entities must suggest the best fixed-income research opportunities to their clients. They depend on market and research reports generated by expert analysts. While some financial institutions have a dedicated fixed-income research department, many rely on third parties for periodic information.

Fixed-income research becomes challenging in markets offering low interest rates, as investors might demand higher yields. It does not mean there cannot be better investment opportunities in a low-interest-rate environment. Continue reading to learn more about fixed-income research in a low-interest-rate environment. 

What Exactly is Fixed-Income Research? 

Before delving deeper, it is essential to understand fixed-income research. It is a field of study for evaluating fixed-income securities and finding the best investment opportunities. Fixed-income securities are usually debt instruments that denote a loan from the investor.  

In exchange for the loan, the issuer provides regular interest payments to the investor. Government bonds, corporate bonds, collateralized debt obligations, commercial papers, perpetual bonds, floating rate notes, and other debt instruments fall under fixed-income securities. 

Investment banks, asset managers, AMCs (Asset Management Companies), and other entities are interested in fixed-income securities. While some of these entities invest their money, many recommend fixed-income investment opportunities to their clients. Finding the best fixed-income options is challenging for any organization, especially in a low-interest-rate environment.

Must Read: Maximizing Efficiency: How Banking Outsourcing Services Benefit Financial Institutions

Fixed-income research includes a range of processes, like credit evaluation, macroeconomic analysis, yield analysis, and interest rate analysis. These processes are essential to determine the fair value of debt security and make informed investments. For instance, credit evaluation is crucial in determining the repayment capacity of the issuer. An issuer with a poor credit rating might fail to meet financial obligations, thus reducing the value of the associated debt security. Let us now discuss the scenario of fixed-income research in a low-interest-rate environment. 

Fixed Income Research in Low-Interest-Rate Market

Fixed-income research can be challenging in a low-interest rate environment. Analysts and researchers need help finding investment opportunities in such a market. The biggest challenge is meeting the demand for high yields on debt instruments. When the interest rate in the market is low, investors receive fewer returns on debt instruments. Analysts use different yield measures to determine the performance of debt securities in such a market.

Some investors might be keen on taking additional risks to enhance the yield. For instance, investors might go for extra credit risk to generate more yield on bonds in a low-interest-rate environment. While the product may increase, there is a chance of default in such a market. Investors might need to recover costs when the issuer declares bankruptcy.

Reviewing financial statements, ratios, and other parameters before investing in debt securities is essential. Fixed-income research professionals can identify potential issuers based on their financial health. Investing in sustainable debt securities will help investors collect the interest for a longer tenure.

Fixed-income research in a low-interest-rate market depends a lot on duration management. The idea is to manage the portfolio’s duration and combat the interest rate risks. It means selecting bonds and other debt securities based on the course or time of interest rate fluctuations. When interest rates are at historically low levels, there is always a chance of an uptrend. In such a case, investors might try bonds with a shorter tenure to combat the risks.

Insights generated from fixed-income research can add protection against inflation. Inflation is a significant factor in low-interest-rate markets. Corporate entities must implement fixed-income research practices to make informed decisions. Some investment banks, AMCs, asset managers, and other entities might need more in-house professionals for fixed-income research. Partnering with third parties offering high-end fixed-income research services is always better. You can choose Acuity Knowledge Partners for investment-grade research, high-yield research, structured products, shadow rating (for unrated issuers), and more. 

To conclude

Fixed-income research becomes essential in low-interest-rate markets. These markets are vulnerable to interest rate fluctuations. Fixed-income research can help identify debt securities with better returns. One can analyze the creditworthiness of the issuer to make informed decisions.