The President of the United States Donald trump is actively signaled by the fed that now is not the time to raise dollar bets. “It is incredible that a very strong dollar and with virtually no inflation… the burning Paris and China is on the decline, the fed is still considering another increase in interest rates,” wrote trump on Twitter.
In this way, the growth rates in the next year may not have a direct impact on bond prices since it is already taken into account by the market participants at current prices. So the holders of bonds should worry only if interest rates will rise faster than expected now.
The market is not expecting too much higher interest rates in the second half of 2019, but the fed can get out of analysts ‘ forecasts in the case of acceleration of inflation above the target level of 2%.
Of course, sometimes accelerating inflation, which affects the rate decision, can confuse. But while price growth in most world economies remains extremely slow and probably will not greatly accelerate in the coming years. The reason is technological advances and price competition among IT companies, which in the fight for market share cannot increase prices. So the panic and fear of a sharp rise in inflation is not worth it.
Where to find yield
And the dollar and ruble-denominated bonds with maturities of 2-4 years now look more attractive than deposits. Russian sovereign dollar bonds maturing in 2022 provides a yield of 4.2% and the portfolio of robust corporate Eurobonds will give about 5-5,5% per annum.
Those who want to diversify their investments or to reduce Russian risk, suitable portfolio of dollar-denominated securities of emerging markets. The yield of this basket of Eurobonds will be 5-6%.
Investing in corporate Eurobonds, should take into account that you have to pay tax as the profits in US dollars and the exchange rate revaluation, if the investment period the ruble weakened. But in the case of purchase of government dollar-denominated bonds of the Russian investor is exempt from taxes from the currency revaluation and payment of personal income tax on coupon payments.
OFZ maturing in 2022 is now trading with a yield of 8.4%. Personal income tax with the coupons on these securities is not paid. High-quality corporate bonds denominated in rubles with the repayment period of 2-4 years can bring from 8.7% to 10%. In this case the coupon income on corporate issues posted after 2017, are not subject to personal income tax.
At the end of 2019, the Bank of Russia plans to begin a cycle of reducing interest rates (according to estimates, annual inflation will return to a level of 4% in the first half of 2020), which will allow even more bonds to exceed the yield of deposits.
Russia’s economy, according to various forecasts, will grow at a slow pace, about 1.5-2% per year, which speaks in favor of low loan demand in the coming years. In this context, new issues of bonds for corporate borrowers of the first-second tier, not particularly increase.
Because of ruble inflation, according to forecasts of the Central Bank in the coming years will not exceed 6%, on investments in corporate securities can earn 3-4 percentage points in excess of inflation and increase the purchasing power of their rouble savings.
He who seeks shall find
What happens if the investor buys bonds now, while interest rates then suddenly you grow up? First of all, you need to understand that this is not necessarily bad. The value of bonds will fall, but it is temporary. And, as the saying goes, a blessing in disguise. In the long term the investor still benefits from higher interest rates. And here works is simple math.
If, for example, in the portfolio was 10 bonds with a rate of 9% (that is, the yield of the portfolio was 9%), and the price of the securities decreased, the yield has increased accordingly – say, up to 10%. If we sell securities, we will record a loss in the amount of cost reduction will not reach the originally laid down 9%.
But if the investor has the opportunity to invest additional funds in bonds, even acquiring the 10 securities, the portfolio returns of the 20 bonds will reach 9.5%. This is income that the investor will get, if you wait for maturity.
In addition, even if the investor has no plans to buy bonds every six months on individual securities are paid interest payments periodically paying off some bonds in the portfolio, and these funds can be reinvested at higher rates. That is, the higher the interest rate, the more money can be earned on these reinvestments.
The stock market is good for its variability – the fact that everyone here can decide that for him is right and what is not. Some people prefer to shift into deposits and to wait for some time, and someone who understands that now is a good opportunity in the market. The final grade for all investors the market put, and it will be higher in those who will try to get the most out of the current situation.