Despite steady interest income from its holdings, financial and currency market volatility dampened Sterling Investments’ profits in the March quarter, wiping out a third of its bottom line.
The boutique investment firm primarily deals in fixed income investments around the world, particularly US bonds. Predictable nervousness stemming from discussions and subsequent actions by the Federal Reserve, the central bank of the United States, in raising interest rates spurred bond market contraction, said Sterling CEO Charles Ross. Investments Limited.
Fed tightening, he added, has driven stocks and bonds down, especially since the first quarter of this year.
“Even before the Fed moved with its interest rate hike, markets had already priced in about a year of rate hikes,” Ross said.
Sterling Investment’s quarterly profit fell from $55 million last year to $36 million for the current period. The main contributor to the decline is foreign exchange, which went from a translation gain of $28 million to a loss of $8 million. But Sterling also reported a sharp decline in gains from the sale of investment securities, from $17 million to $5 million.
On the positive side, interest income increased from $35 million to almost $40 million.
The company, whose 1,100 shareholders include pension funds and other long-term investors, assures them of returns through the payment of dividends, despite its declining results.
“Shareholders aren’t so badly affected, as SIL pays dividends on the gains made,” said Vice Chairman Marion Ross, daughter of the CEO.
Additionally, the bond trading firm is looking for bargain buys as part of its loss mitigation efforts.
Mid-week, 10-year US Treasury bond yields fell to 2.88% from 2.97% on Tuesday as investors shifted money to lower-risk investments. Earlier in May, the 10-year had exceeded 3.2%. Yields generally fall when bond prices rise, and vice versa.
“Interest rates are expected to rise significantly over the next few months and market prices for many financial assets are expected to decline. This will create buying opportunities for investors and the company. SIL thrives in times of crisis and we are cautiously assessing the market for undervalued investments,” said Marion Ross.
“What that means is that it’s really not a good time to sell. Indeed, it’s already a buyer’s market, but in the next six or 12 months or so, we’ll start to see the real buying opportunities,” added Charles Ross, noting that the Fed should continue to raise interest rates, and that even just the expectation of a recession can cause a sell-off, which would bring windfalls to investors. buyers.
Sterling will rely on margin loans from brokers to fund the purchase of securities, as well as its own short-term investment vehicles which will soon mature.
“The good thing about this is that there will be cash flowing from these securities during this period; and because the bonds are short-lived or close to maturity, there is little price risk involved in holding of these positions,” said CEO Ross.