Talking Heads – How to lock in attractive interest rates for fixed periods

This is an audio transcript of the Talking Heads podcast episode How to lock in attractive interest rates for fixed periods

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads Podcast. Every week, Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing fixed maturity products. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Peter Oyens, CMO. Thanks for joining me.

Pieter Oyens: Hi, Daniel.

DM:  Pieter, if we think about interest rates, one of the key factors is the expectation on the part of investors that central bank rates will be falling over the course of the year. If we look at the eurozone, we see that policy rates have already started to fall and that they will be falling in the US at the next meeting from the US Federal Reserve. From an investor point of view, policy rates may be at their peak. And that brings us to fixed maturity products and why they might be an interesting area for investors to look at. Pieter, could you explain to our listeners what exactly are fixed maturity plans?

PO: If you look at mutual funds, when a mutual fund is launched, typically they stay there forever until unless somebody decides to close them. With a fixed maturity product, what’s different, as the name suggests, is that after a certain period – that can be three, five or seven years, these products typically lapse, which means that the underlying assets are liquidated and returned to the investors.

DM: Pieter, we’ve defined what fixed maturity plans are. We’ve talked about why we think they’re a particular interest to investors now. Can you go into a bit more detail about some of the key characteristics?

PO: So, in the current market context, as the markets have normalised from an interest rate perspective, investors [are] looking to lock in yields where they are today. If you want to do that using fixed income instruments, bonds, you’re talking about investing 100 000 euros into single bonds. What fixed maturity products can do is that you can invest a relatively small amount of money, let’s say 50 or 100 euros, and in return you get bond-like features, which means that you have a cash flow pattern which is quite similar to bonds. You are expecting to get regular coupons during the life of the fixed maturity plan and at the end of it, you will be receiving back your principal amount.

Now, of course, these products are subject to credit risk, but different from investing in single bonds or a small number of bonds, you are getting access to a well-diversified pool of bonds, so maybe 50 to 100 bonds, typically investment-grade, [in] euro or US dollar. So that’s what makes it quite attractive in the current interest rate environment. Maybe to add to that, fixed maturity plans also provide easy liquidity, meaning if they’re wrapped in a mutual fund, you can obviously buy or sell these mutual funds on a daily basis. An innovation since 2023 is the launch of exchange-traded funds that basically are offering the same type of exposure. In this case, liquidity would even be intraday.

DM: Pieter, what are some of the strategies that investors can use to take advantage of these fixed maturity plans?

PO: In addition to locking in the current interest rates, what these instruments allow [investors] to do, [is] to apply a strategy called laddering, where you’re basically matching cash flow needs. You can basically buy the individual fixed maturity plans for the amount required and you know that you will have this liquidity at the right time without having to liquidate assets at that specific time in [the] market.

DM: Pieter, if I could summarise some of the key points that you made, to start off with, we’re an environment where short-term interest rates either have or will soon be peaking as central banks look to lower policy rates as inflation gets back to target. That’s clearly important for investors who might like to lock in the higher interest rates . Fixed maturity plans are potentially an attractive way to do that. They offer you the benefits of a fixed income investment in terms of a regular income and your principal back at maturity, but with the additional advantages of diversification, liquidity and lower costs.