The Finatical
Week of November 2nd, 2021 - Bonds Tips, China's Prepares for a US Tapering, China’s Economy Decelerates
FinaticTips - 3 Tips to Learn about Bonds
What are Treasury Bonds?
Treasury bonds (T-bonds) are government debt securities issued by the U.S. Federal government that have maturities greater than 20 years. T-bonds earn periodic interest until maturity, at which point the owner is also paid a par amount equal to the principal. Treasury bonds are part of the larger category of U.S. sovereign debt known collectively as treasuries, which are typically regarded as virtually risk-free since they are backed by the U.S. government's ability to tax its citizens. Along with Treasury bills, Treasury notes, and Treasury Inflation-Protected Securities (TIPS), Treasury bonds are one of four virtually risk-free government-issued securities. T-bonds pay semiannual interest payments until maturity, at which point the face value of the bond is paid to the owner.
T-bonds are often purchased by individual investors when they wish to keep a portion of their retirement savings risk-free or to increase their savings reserves for their children’s education. However, individual investors must hold their T-bonds for a minimum of 45 days before they can be sold on the secondary market.
There is an active secondary market for T-bonds, making the investments highly liquid. The secondary market also makes the price of T-bonds fluctuate considerably in the trading market.
Treasury Bonds vs. Corporate Bonds
Treasury bonds are considered risk-free investments as the initial or principal investment is guaranteed by the U.S. Government once the bond has matured. However, the case is not the same for corporation bonds.
Corporation bonds are debt securities that are issued by a corporation. While the corporation does agree to pay back the initial payment to investors once the bonds matures, there is no guarantee and a high level of risk involved. There is a default risk in which case the corporation may not be able to pay back the initial payment to its investors. But this does not necessarily mean that treasury bonds are better than corporation bonds. While treasury bonds are risk-free, the rate of interest that they offer is much lower as compared to the one offered by corporation bonds.
Each type of bond has its pros and cons and a lot of factors must be considered before deciding on one.
Here are some factors that you must consider:
Bond Maturity Range
Bond Interest Rate
Tax Considerations
Risk Involved
Current Condition of the Economy
Pros and Cons
Pros:
Steady Income: Bonds are at a fixed rate of interest and thus provide a steady stream of income
Risk-free: Investors that hold the bond until maturity are guaranteed their principal or initial investment.
Liquid: Treasury bonds can be easily sold before their maturity in the secondary bond market due to the availability of a large number of buyers and sellers.
Many Investment Options: Treasury bonds can be purchased individually or through other investment vehicles that contain a basket of bonds, such as mutual funds and exchange-traded funds.
Cons:
Lower Rate of Return: While bonds are basically risk-free, they do offer a lower rate of return compared to other investment options.
Inflation Risk: Inflation or rising prices erodes the overall return on fixed-rate treasury bonds.
Interest Rate Risk: In an economy with rising interest rates, there is a much higher chance that the treasury bonds will underperform.
Realised Loss: A loss can be realised by selling a bond in the secondary market before its maturity.
FinaticTrends - 2 Financial Trends
1 - China Prepares for a US Tapering
Around the world, central bankers and other economic policy makers are apprehensive about the potential implications of a shift in US monetary policy. The US Federal Reserve has signaled that it will soon taper, or gradually reduce, asset purchases. There is an expectation that, when this happens, US bond yields will rise, thereby stimulating flows of capital from other countries into the United States. That, in turn, would likely put upward pressure on the value of the US dollar, or downward pressure on other currencies, especially those in emerging markets. Indeed, bond yields and the US dollar have already risen recently, partly in anticipation of the shift in policy.
In China, policy makers have lately publicly addressed this issue. China is in a favorable position compared to many other emerging countries, given its vast supply of foreign currency reserves. Moreover, it has regulatory limits on outflows of capital, although investors in China are often able to find ways to move money in and out of the country. This includes using false valuations for invoices of either imports or exports.
Still, once the US Federal Reserve starts to act, China will face a choice. It can either continue to stabilize its exchange rate, which would likely entail selling foreign currency reserves—doing so would mean a tightening of Chinese monetary policy as it would entail a reduction in the central bank’s volume of assets—or it could let the currency float, in which case it might depreciate sharply. This would boost the competitiveness of exports, but it would also add to inflationary pressure. Moreover, depreciation might cause further tension with the United States that often complains that China intentionally undervalues its currency. In addition, depreciation would not be helpful to Chinese companies with foreign currency debts. Thus, there is no easy solution.
2 - China’s Economy Decelerates
China’s economy decelerated in the third quarter. Real GDP grew 4.9% from a year earlier, the slowest growth since the third quarter of 2020. In addition, real GDP was up only 0.2% from the second to the third quarter, which translates into an annual growth rate of less than 1.0%. This was the second-lowest quarterly growth since the government began tracking this in 2010. As such, one can argue that the Chinese economy effectively stalled in the third quarter. Why? Among possible explanations are the damaging effect on production from the shortage of electricity; disruption of supply chains due, in part, to COVID-19; weakening of the massive property market; and the negative impact of periodic regional outbreaks of the virus on consumer mobility. China’s zero-tolerance policy toward the virus has meant that even modest outbreaks have been met by strict restrictions on activity and that is a major reason for their current economic condition.
Financial Guidance
“The desire of gold is not for gold. It is for the means of freedom and benefit.” - Ralph Waldo Emerson
American essayist, Ralph Waldo Emerson, explains the motivation behind accumulating wealth. Money, or gold, in and of itself is not the ultimate goal of wealth; the freedom it affords those who obtain it is.
Money Fact
The US Is Home to the Most Billionaires
Although China is home to the most new billionaires, the United States still has the most overall, Forbes reported. There are 724 billionaires in the U.S., though China is close behind with 698 billionaires. India has the third-highest number of billionaires, with 140, Germany has the fourth-highest number, with 136, and Russia has the fifth-most billionaires, with 117.
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