Market news | 18 November, 2019

The Federal Reserve lowers the reference rates and applies new stimuli

Alberto Villasán Investment and Markets Director

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.

The Central Bank of the United States (Fed) has again lowered the reference rates for the third consecutive time during 2019. Forecasts at the end of 2018 were of rate hikes. Nowadays our thought continues to be, that the Federal Reserve won’t be able to upload them for a long time (years) and there is still a long way down.

The Fed has not only limited itself to lowering reference rates, but it has also applied new stimulus measures by buying shorter-term bonds with the objective of limiting the rebounds of the same to which banks lend money to each other (interbank market).

A rebound in long-term rates 

This new stimulus measure, together with monetary policy, has returned some optimism to the economic situation that has been reflected in the rises of the advanced economic indicators and in the rebound in USD rates in the medium and long term.

 A new investment opportunity

As we have shared on previous occasions, excess debt, economic globalism and deflationary pressures will continue to press downward reference rates and that, therefore, any rebound in these should be a buying opportunity in the medium term for conservative investors.

Specifically, we consider the purchase of bonds of high solvency companies in the United States with a maturity of 4-7 years, an investment on which we carry double-digit 2019 benefits.

It is true that there are investors who think that rates in the United States are not going to go down any more, or that they could even resume the bullish path. These investors are based on the past and the fact that they have been at much higher levels in the last 50 years. We think that there is a high risk that this idea is a mere delusion that can be dissipated during the course of the year 2020.

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