Best Government Bonds To Buy 2017
Quantitative easing (QE) is an unconventional expansionary monetary policy that central banks have turned to once they have reduced their own policy interest rates to, or close to, zero. The central bank creates money electronically and uses it to buy assets, usually government bonds, from the market. This increases the amount of money in the financial system, which encourages banks to lend more and can push interest rates lower, which encourages businesses and households to borrow. In turn if businesses use the money to invest and consumers spend more, this can give the economy a boost.
best government bonds to buy 2017
Quantitative tightening (QT) is a contractionary monetary policy that is the reverse of QE. The government bonds and other assets that central banks have bought from the market through QE programs are held on their balance sheets, massively increasing their size. QT occurs when central banks start to reduce their balance sheets. In 2019, the US Federal Reserve is allowing its bond holdings to mature rather than replacing them. This is known as passive tightening. The Bank of England and European Central Bank have stopped their asset purchase programs but are not yet reducing their balance sheets. This means their balance sheets will shrink relative to GDP over time, which is known as organic tightening.
Tax-exempt advance refunding bonds allowed states and localities to refinance existing debt with the greatest flexibility, resulting in substantial reductions in borrowing costs. The elimination of advance refundings in the 2017 Tax Cuts and Jobs Act (TCJA) as a cost-savings tool for state and local governments has limited the options to refinance debt, especially since interest rates will certainly fluctuate over the lifetime of outstanding governmental bonds (which in many cases is 30 years). Advance refundings represented 27% of municipal bond market activity in 2016 and 19% in 2017. As a result, state and local governments are now paying more in interest, a cost that must be paid by state and local residents. Furthermore, in addition to eliminating tax-exempt advance refunding, the TCJA decreased the overall corporate tax rate from 35% to 21% and ended other tax incentives that could impact overall demand for municipal bonds. Market experts are keeping a keen eye to see how the market will react to possibly reduced supply, less demand due to corporate tax changes, or perhaps increased demand by individuals who are looking for tax exempt products to help alleviate tax exposures due to new state and local tax deduction limits. Governments should be aware of these market dynamics as they consider going to market and determine appropriate action with consultation of outside professionals.
We like very short-term government paper for income and inflation-linked bonds. We also like emerging market assets that can better withstand the troubles in major economies. We have downgraded investment grade credit to neutral and higher yield to underweight as we see the banking tumult leading to tighter credit conditions.
Famously profitable, the best-managed pharmaceutical companies should be able to offset reduced unit prices with volume growth. In their report dated January 2017, Evercore ISI analysts Umer Raffat and Akash Tewari note that most of Medicare/Medicaid spending increases are due to higher enrollment, not because of pharmaceutical costs. While total U.S. health-care spending continues to increase, the percentage attributable to prescription drugs has stayed flat, at around 10 percent.
Our conclusion is that it will be dangerous to fight the Fed. If you are fully invested, think about cashing in some of the gains seen in recent weeks. We suggest taking refuge in government bonds via an ETF such as the iShares 20+ Year Treasury Bond ETF (TLT). If you want to retain some exposure to equities, focus on quality stocks, perhaps using an EFT such as the iShares MSCI USA Quality Factor ETF (QUAL).
In such an environment, where are the investment opportunities? As economic growth disappoints, expect bonds to beat equities. We favor U.S. Treasuries over other developed-market government bonds. Slowing growth and easing inflation pressure also favor Chinese government debt. Options strategies that bet on a long-term higher level of market volatility or that hedge equity risk will also likely be rewarded.
Federal bonds (BUND) with maturities of 7 to 30 years form the middle to long end of the Bund curve. More than 60 % of the Federal government's debt portfolio consists of bonds in this maturity segment. Approx. 40 % of this is accounted for by 10-year bonds.
Federal bonds are the most important financing instruments for the Federal government. This applies equally in the primary and secondary market. Their share of the auction volume regularly amounts to a fifth, and in trading they account for about half of the volume.
Federal bonds are one of the most heavily traded government bonds in the euro area. The risk of not finding a trading partner, i.e. not being able to sell them at any time, is extremely low. The Finance Agency and the Deutsche Bundesbank also maintain the market and, if necessary, act as trading partners on the market themselves.
Abenomics led to rapid appreciation in the Japanese stock market in early 2013 without significantly impacting Japanese government bond yields, although 10-year forward rates rose slightly. Around 70% of Japanese government bonds are purchased by the Bank of Japan, and much of the remainder is purchased by Japanese banks and trust funds, which largely insulates the prices and yields of such bonds from the effects of the global bond market and reduces their sensitivity to credit rating changes. Betting against Japanese government bonds has become known as the "widowmaker trade" due to their price resilience even if fundamental analysis indicates the contrary should be true.
The growth of annual revenue was slowed down by the prolonged depression. Consequently, the governments started issuing additional national bonds to cover the interest payments. This national bond is called renewal national bond. As a result of issuing these bonds, the debt is not actually repaid, and the amount of bonds issued continued to grow. Japan has continued to issue bonds to cover the debt since the asset price bubble collapse.
Economist Kazuhito Ikeo stated, "Quantitative easing and debt monetization are different from each other. We must not assume they are the same just because both involve the Bank of Japan buying government bonds. 'Lending money' is clearly different from 'giving money', but we just see the money move from one place to another, and they look exactly the same in that aspect.
The Public Finance Act prohibits the Bank of Japan from buying government bonds directly. Nevertheless, according to the provision, it is allowed to buy when the National Diet approves the bill. These regulations result from reflection that the Bank of Japan brought about violent inflation by their public bond purchases during the period from before to just after the War.
Those looking back at 2016 may be surprised to find a lack of volatility as markets generally took in stride both the United Kingdom's vote to leave the European Union (known as Brexit) and the surprise election of Donald Trump as the next president of the United States. As equity markets-particularly in the United States-moved higher, global interest rates remained historically low, with negative government bond yields in Germany, Japan and Switzerland making headlines. This may change in 2017, however.
Even if we do not see a general paradigm shift toward widespread rising interest rates globally, rates can rise suddenly and strongly, taking the markets by surprise. When that happens, traditional government and corporate bonds face losses, and the potential losses are typically higher for bonds with longer maturities. This risk is expressed as duration risk-the measure of a fixed income instrument's sensitivity to changes in interest rates.
European government bonds sold off after some policy makers at the European Central Bank, including Klaas Knot, disputed the need for additional asset purchases. Investors have been expecting the ECB to go forward with a stimulus package at its September meeting.
After rising consecutively for the five previous quarters to an all-time high, the proportion of respondents who consider corporate bonds to be overvalued has dropped marginally, from 84% in Q2 2017 to 82% in Q3 2017.
The Q3 Valuations Index survey closed on 18 October 2017. Investors polled were asked to give their perceptions based on the following values: developed market equities (represented by MSCI Developed Market Index), $1989.08 at close 25 September 2017; emerging market equities (represented by MSCI Emerging Markets Index), $1090.10 at close 7 September 2017; government bonds (represented by J.P. Morgan Global Government Bond Index), yield 1.3% at close 7 September 2017; corporate bonds (represented by S&P International Corporate Bond Index), yield 1.61% at close 26 September 2017; and gold (represented by the London spot fix), $1349.22 at close 7 September 2017. The survey was open to all CFA UK members and there was a total of 200 respondents. 041b061a72