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Best Government Bonds To Buy 2017
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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.
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).
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