Fixed-Income Investments Held by Retirees Face Massive Drawdown Due to Inflation

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While there are inherent risks associated with any investment, the normally “safe” global bond and fixed-income markets have been hit with remarkable losses amid efforts to tame inflation. All investors are affected by downturns — however, damages to fixed-income investments might have a greater impact on seniors, who often favour the more stable source of income these assets provide. Per Bloomberg, Treasury notes have fallen to a yield of just 2.36%, far behind February’s posted rate of year-over-year inflation — 7.9% — as provided by CNBC, based on consumer price index (CPI) data.

“The safe haven attributes of Treasuries have been undermined when one adds duration risk to the equation,” said analyst Winson Phoon of the current fiscal portrait, according to Bloomberg.

A further cause for concern: Bloomberg reports its Global Aggregate Index, a benchmark for government and corporate debt total returns, has suffered a heavy drop in value. In a record slide of 11% from a peak high in Jan. 2021, this decrease equates to a drop in the index market value of about $2.6 trillion — a figure which is worse than the $2 trillion drawdown recorded during the financial crisis of 2008.

Elderly individuals depend on their assets to fund their lifestyle — and even in a volatile economic environment, many senior investors feel safer with fixed-rate options for investment. Generally speaking, many senior investors’ resources tend to be placed in investments which are considered low-risk, but with a small portion set aside that will hopefully result in capital appreciation to counter rising inflation.

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But even these investments can lose money, especially because their value is particularly sensitive to interest rate increases and long periods of high inflation — precisely the situation the current market faces. Since the interest payments from existing fixed-income assets become less competitive relative to more recent, higher-rate fixed-income instruments, total values of existing fixed-income assets will typically stagnate or even fall. In other words, there is an inverse relationship between interest rates and fixed-income asset prices.

With inflation rising to 7.9% in February and consumer prices soaring, a new war in Ukraine has upset global energy markets that were already weakened by the COVID-19 pandemic. There appears to be a widespread belief that a prolonged trend of high inflation will be difficult to reverse without the country falling into a recession.

This fall in the fixed-income investment market is upsetting news for senior investors, many already often feeling vulnerable and worried. Normally, investing in fixed-income securities is a wise choice for individuals looking for stability and security, a predictable and modest income, and a diversification of their existing portfolio (minimizing overall risk).

The combination of Russia’s invasion of Ukraine, the prolonged COVID pandemic, and continuing rate increases to fight inflation has worsened the outlook for most investors — though especially for typically fixed-income, often risk-averse senior investors.

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