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FINRA: Volatile Interest Rates Are Next Major Threat to Investment Portfolios

FINRA is warning securities industry stakeholders of volatile interest rates, which the regulatory authority proclaims is the "next major threat" to industry customers.

Citing securities industry failure during "flex times" when there is a risk of volatility, FINRA CEO Richard Ketchum warned of intensely volatile interest rates and their potential effects on yields, noting that high-yield fixed income products could fall in value as bond prices fall. Ketchum also made reference to real estate investment trusts ("REIT") as susceptible to "secondary and tertiary effects" of interest rate volatility.

Ketchum said the danger lies in the fact that "regulators don't know how [an interest rate] is going to change or whether it is going to change." Ketchum's recommend strategy? "I would really be focused on communication…and on concentrated positions," which Ketchum says are more susceptible to an increased "intense period of volatility."

The Authority has been pushing the interest rate issue to its registered broker-dealers, requesting that its firms train brokers in how to have conversations with customers pertaining to interest-sensitive positions and how rising interest rates may affect them.

FINRA previously discussed interest rate, or market, risk as it relates to bonds, noting that risk increases the longer a bond is held.

Describing the "cardinal rule" of bonds, FINRA wrote: "When interest rates fall, bond prices rise, and when interest rates rise, bond prices fall."

When rates rise and bond prices fall, newer (and higher) coupon rate bonds compete with older, lower rate bonds, resulting in decreased demand and depressed bond prices in the secondary market.

Referring to the scenario of rates falling (thus, bond prices increasing), FINRA identified call risk, or the problem posed when a bond's principal is repaid early and the investor is unable to find a similar bond with a similar yield. This generally happens when an issuer "calls" a bond, paving the way for the issuer to sell new bonds paying lower interest rates.

In either scenario, the risk is real and, pursuant to FINRA's initiatives with its member firms, should be properly communicated by brokers and similar associated persons.

If you have invested with a broker or financial professional whose failure to adequately inform you of the risks or effects associated with changing interest rates has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

News: FINRA Warns of Risks of Volatile Interest Rates (onwallstreet)

Categories: FINRA, Bonds, Risk
The Law Offices of Jonathan W. Evans & Associates - California Securities Fraud Attorney
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Phone: (800) 699-1881 | Local Phone: (818) 760-9880.