Some time ago, there was a telegram group member who bought the Series SR016 Retail State Sukuk with an interest rate (coupon) of 4.9%. He bought on the secondary market at a price face value. Even though it’s guaranteed to be intact if HODL arrives matureit is almost certain that he will suffer a loss, namely suffering from EOL (expected opportunity loss).
This is basic knowledge, but who knows there are those who don’t know and need it.
When interest rates are trending up again, you should avoid buying fixed-rate bonds. Especially bonds with long tenors, for example ORI, SUKUK, Bonds, or deposits. Why is that? Come on, see dude!
The Relationship between Interest Rates and Fixed-Rate Bond Prices
So what is the relationship between interest rates and bond prices (fixed-rate) in the secondary market?
In general, interest rate levels are inversely related to the price of fixed interest bonds in the secondary market. For example when interest rate increases, the price of bonds in the secondary market falls. This is very logical, if we understand the reason. For example bond A 4% coupon, then interest rate increase to 6%, bond A value will automatically decrease. Because currently there are other assets that offer higher interest/coupons, namely 6%. Bond A will fall such that coupon A is closer to 6%.
See the following table, when interest rates increase, usually the price of bonds in the secondary market will decrease, until both have coupon yield The same.
So it’s clear, why buy a 4.9% coupon SR when it’s a loss. Because you only get 4.9% per year until mature, while now it’s more than that and has the potential to be even higher. If you want to sell on the secondary market, the cost price will decrease in value, until the SR yield is approximately 6%. Even if you plan to hold it until maturity, you will only get 4.9% while the interest rates are generally much higher. This is why I mentioned earlier that there is EOL EOL (expected opportunity loss), where you should be able to get 7% for example, but only get 4.9%.
The opposite also applies. When interest rates trend down, bonds with high coupon values will increase in the secondary market.
So you should buy fixed-rate bonds when interest rates are trending down, and sell (or don’t buy) when interest rates are trending up.
Reasons Don’t Buy Fixed-Rate Bonds Right Now
Currently interest rates are still relatively low and will only start to rise. The USD currency is also strengthening again and it seems that the Fed will still raise interest rates, although perhaps not as wisely as before, increasing 75 bps at a time.
You can read more about this in my previous article, namely Era of High Interest Rates and Inflation? and Reasons for Bullish Stock Markets, Potential Bubbles, and How to Respond to One.
ORI, SR, SBR, and the like with a 4-5% coupon are actually the lowest interest rates so far, previously they were up to 8-9%, even more. See the following table.
Because the USD is strengthening and the Fed is still going to raise interest rates, logically Bank Indonesia will still be raising interest rates again.
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Explanation of Interest Rate Risk from SEC
The following is a more detailed explanation of Interest Rate Risk from SEC.
The Trend of Interest Rates Rising: What To Do
What should we do if there is currently a portion of cold cash funds?
1. Don’t enter fixed rate bonds with long lock-periods (tenors). Because interest rates are likely to still rise. By buying fixed-rate bonds now, we can lose opportunity costs (only get 4-5% while later it will be 8% for example).
2. Another option is to temporarily put it in a deposit with a short tenor, for example 1-3 months.
3. Another alternative, you can enter into Money Market Mutual Funds (RDPU). The reason is because RDPU is very liquid, you can cash it at any time without penalty, and usually every day the NAV grows. RDPU returns are usually similar to deposits/ORI, please just choose which one suits you best.
