Welcome to Mintos Insight, our monthly publication that provides an overview of what’s been happening on Mintos, including commentary from our experts, recent investor activity, educational topics, and more!
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- As inflation continues to rise, major central banks (such as the Federal Reserve) are increasing interest rates, which has significant consequences for the investment market
- Fixed-income investments such as bonds come under pressure when interest rates rise because the already low returns struggle to offset the price drops
- Loans, on the other hand, with their high-income and short-term nature, can provide investors with a larger buffer when inflation is high (and interest rates are rising)
- In terms of activity, investors on Mintos earned over €3.5 million in interest at an average rate of 9.47% in January
- The average net return for last month was 0.67%, and the average portfolio value was around €2 700
What rising inflation means for fixed-income investments
This month, we look at one of the financial market’s biggest topics at the moment: inflation. As you’ll see in the graph below, the inflation rate in the Euro area, for example, has been continually increasing since the start of 2021, peaking at 5% in December last year.
Essentially, the more inflation rises, the more it costs to buy something or receive a service. Last year’s rise in the Euro area mostly reflects the sharp price increase of fuel, gas, and electricity1. And as with other macroeconomic factors, these changes can have vast implications for the global economy and financial markets. But not all asset classes are affected in the same way.
How does inflation affect fixed-income investments?
When inflation continues to rise, it’s common for central banks to increase their interest rates – as recently seen in the United States. The idea is to make borrowing funds (and therefore spending them) more costly, and in turn, slow down the pace of inflation as people start to spend less.
For fixed-income instruments such as bonds, their relationship with interest rates isn’t necessarily as you’d expect. Low interest rates actually mean high bond prices (and vice versa). Let’s look at an example using a 1-year zero-coupon (no interest payable) bond with principal of €1 000 payable at the end. If the average interest rate for bonds is around 3%, then an investor is usually willing to pay €971 (3% less than €1 000) for this type of bond – which would ensure they get a 3% return. But if interest rates then increased to 4%, the amount an investor would be willing to pay for the bond would fall to €962 (4% less than €1 000). So the relationship here is inverse.
The longer the bond term and the smaller its interest payments, the more sensitive it is to these interest rate shifts. Therefore, in a rising interest rate environment, long-term bonds and highest quality bonds can experience price drops that can’t be offset by the already low interest income these bonds produce – leading to negative returns for investors.
Investments outside of fixed income instruments can also become volatile and experience price drops when interest rates rise. The value of equity (or stock), for example, is essentially the sum of a company’s discounted future cash flows. And when interest rates go up, the discount rate also goes up, leading to a lowering of the stock price – in the same way as bonds. So it’s no surprise that with the high rates of inflation and expectation of interest rate hikes, both the equity and bond markets saw price drops in January.
Therefore, investments in loans can be a good place to turn to in this environment of looming interest rate hikes. While also fixed-income instruments, the high-interest and short-term nature of loans can provide a larger buffer to any negative impacts from interest rate increases. For example, the average interest rate for loans available on Mintos is above 9% and the average term is 18 months, with regular principal and interest payments.
Mintos Activity: January 2022
In January, over 650 000 loans were funded equivalent to €128.3 million, and investors on Mintos earned over €3.5 million in interest at an average rate of 9.47%. The top 3 markets for investments in loans were: Spain, The Russian Federation, and Mexico.
“After a sharp increase in the cost of liquefied petroleum gas at the beginning of 2022, a series of massive protests began in Kazakhstan,” explains Peteris Mikelsons, Account Management Team Lead at Mintos. “There were signs that the unrest will be of a short-term nature, but still, the main objective was to protect investors’ interest, so on 7 January, we limited access to loans issued in Kazakhstan. However, after a week when the situation normalized and we received proof of payment from all lending companies from Kazakhstan, we removed the cautionary measures.”
Healthy levels of investment continued on Mintos in January, and the average interest rate for loans in the EUR denomination on the Primary Market increased by 0.2 percentage points, to 8.8%.
Coming Soon: Mintos Investor Academy
We’re excited to soon launch the Mintos Investor Academy – a guide for building long-term wealth on your own terms. Keep an eye on our blog and social channels for the official launch!
This is a marketing communication and in no way should be viewed as investment research, advice, or recommendation to invest. There is no guarantee to get back the invested amount. Past performance of financial instruments does not guarantee future returns. Investing in financial instruments involves risk; before investing, consider your knowledge, experience, financial situation, and investment objectives.