Investment | 10 May, 2019

Central Banks are the major players

Alberto Villasán Investment and Markets Director

The expected trend in benchmark rates

At the end of 2015, the US Federal Reserve began official rate hikes at a much slower pace than on other occasions and with no apparent reasons for doing so, because neither inflation nor economic growth had passed thresholds for concern.

Valuations of risk assets are very tight so the return that we will obtain from assets in the short and medium term depends more than ever on the Central Banks.

As we have already mentioned on previous occasions, after 10 years of policy rate levels close to zero, financial assets have experienced significant rises in their valuation, leading to very tight valuations and, as a consequence, expected long-term returns below historical averages.

Although, as we know, their short-term return is not so much linked to their valuations but to the flow of news and sentiment from international investors.

At this time, one of the main influencing factors in that regard is the discourse and performance of the main Central Banks, with the US Federal Reserve being the most relevant.

These central banks are debating between lowering rates in order to sustain an economy burdened by high levels of debt, or maintain them in order to avoid bubbles in certain assets and business sectors, without giving a clear message to investors.

This situation of uncertainty is the main cause of the market volatility that we have witnessed over the last 12 months. It is a period that has been characterised by sharp drops in stock markets followed by equally rapid hikes and the consequent generalised bewilderment.

US corporate bonds of highly solvent companies are always a good option.

In this environment of high uncertainty and adjusted valuations, we continue advising our clients to take advantage of upward swings of the debt of the most solvent US companies to take positions and ensure a certain return, while waiting to see how the main financial indices perform.

In that respect, BBVA Switzerland has been developing this investment idea for almost a year with very positive results both in terms of the returns obtained and the lack of volatility of their valuations. It is important to note that one of the keys when undertaking this investment is high diversification and the solvency of the companies in which the investment is made given their high debt levels in historical terms.

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How do the rate hikes affect investors?

The United States Federal Reserve has implemented further rate hikes, as it has been announcing for some time. No clear indication has been given as to how far they will continue to rise, and therefore most investors think that there will be further hikes in the remaining months of 2018 and throughout 2019.

Impact of official rates on long-term treasury bonds

Investors usually believe that buying long-term US treasury bonds during a period of official rate hikes by the Federal Reserve is an unsuitable alternative. However, this supposition may not be completely true. Financial education with BBVA in Switzerland.