Will the United States Become a Bond Haven in 2019?

With Italian bond yields rising quickly from 2 percent to 3 percent since the middle of 2018, it begs the question if the United States will become a bond haven. There are many reasons why the United States Bond Market has the potential to became a refuge for many global investors.

According to a 2016 paper from the National Bureau of Economic Research, safety is in the eye of the beholder – in the case of the global markets, it’s the investor. When there are global economic worries, the paper credits a “nowhere else to go” theory for investors that choose U.S. debt versus others. Along with a country’s ability to handle its own debt, the National Bureau of Economic Research found that even if a country’s “fiscal position deteriorates,” its debt is more attractive as long as the country’s fiscal health is in better shape than others, relatively speaking.

Understanding How the United States’ Situation is More Attractive Globally

Since virtually every country uses debt to run the government, they issue bonds in their respective currencies. The returns on bonds are the interest rates offered by the borrowing country to pay the borrower (either the domestic or foreign buyer of the debt). Looking at 10-year bonds is one way to evaluate interest rates among different countries, be it the United States, Italy, China, etc.

Understanding How Yields or Bond Interest Rates are Determined

With Italian bond rates currently at 3 percent – up from 2 percent in about 6 months during 2018 – this has given many a cause for concern due to the rate of increase. Coupled with the Italian government’s existing debt obligations exceeding its yearly economic output by more than 30 percent, compared to the United States’ debt obligations at about 100 percent of its current economic output, those looking to buy government debt would have a lower risk of not getting paid with the U.S. government issued debt.

When it comes to the global markets determining interest rates, there are two primary factors. The first is how much inflation is expected between purchase and redemption date. This is important because bond buyers want to know how much inflation will impact their investment. The second, and arguably more important, is what are the chances of the issuing government failing to repay its bond or debt obligations in the case of a default.

Understanding the Rise in Italian Bond Rates

While some economies across the world can and do print money to deal with paying off debt, Italy, as part of the European Union, cannot print additional Euros. While inflation is not a major fear for the Italian economy, the recent back and forth between the Italian government and officials from the European Union has raised concerns about excess spending and Italy’s ability to pay for it in the future. The proposal would reduce taxes and increase spending for the public and private sector investment. This is what’s adding to uncertainty about Italy’s ability to service its debt, thus negatively impacting its 10-year bond rates – similar to what eventually happened in Greece.



Used the following PDF from that main site: https://www.nber.org/papers/w22017.pdf










With talks of changing existing trade deals by then candidate Donald Trump now a reality with President Trump, America has taken a different path for international trade. Seeing mixed results during negotiations, global and domestic stock markets have been shaken and are subject to ongoing volatility. Today, foreign trade talks are in flux, and it’s unknown how different deals will affect the stock market in 2019.

Impact for U.S. Automakers’ Trade with South Korea

In the five years since the Korea Free Trade Agreement has been in effect, the Office of the United States Trade Representative (USTR) explains that the entire trade deficit grew to $9.8 billion in 2017, up 57 percent from $6.3 billion. Looking at goods only, America’s trade deficit with Korea grew by three-quarters during the same time frame, from $13.2 billion to $23.1 billion.

When it comes to trade with the Republic of Korea, recent negotiations have opened up additional export opportunities for U.S. automakers to maintain some domestic advantage, along with additional export opportunities to the Republic of Korea. Existing U.S. tariffs of 25 percent imposed upon South Korean trucks will last until 2041, instead of the original date of 2021. Other benefits from the renegotiation include South Korea allowing the doubling of American car imports to 50,000 annually.

Negotiating the New NAFTA With Mexico and Canada

The USTR also reported finalized negotiations as part of the United States-Mexico-Canada Agreement (USMCA), mandating that three-quarters of auto parts be produced in North America, including the United States. The deal also requires that 40 percent to 45 percent of auto parts be produced by workers making at least $16 per hour, increasing the likelihood that production is within the United States.

The renegotiating of NAFTA with Canada has preserved many existing tariffs, including that all food and agricultural products with zero tariffs under the North American Free Trade Agreement remain so. Furthermore, the USMCA has established additional markets and “new tariff rate quotes” for American products.

The new agreement is focused specifically on providing American producers of eggs, dairy and poultry with increased market access in Canada in exchange for Canadian agricultural producers having access to expanded markets in the United States for their dairy products, as well as peanut and processed peanut products, and sugar and sugar-containing products.

While negotiations with Canada and Mexico have opened more markets and promoted higher wages for workers within and outside America, the USMCA is still awaiting congressional approval. This new agreement has generated optimism for increased exports, higher profitability for businesses, and higher wages for workers that may stimulate consumer spending. However, there is less optimistic news when it comes to negotiating with China.

The USTR imposed $200 billion in tariffs of 10 percent on Chinese goods on September 24 of this year, which are scheduled to rise further to 25 percent on January 1, 2019, yielding total tariffs on Chinese goods at more than $250 billion. The impasse in trade talks shows that tariffs can hurt both consumers and businesses using higher-priced commodities on the other end, regardless of the trade partner.

One example is that while car manufacturers may benefit from increased export opportunities in the case of South Korea, with increased costs for labor and materials such as steel or aluminum, the increased opportunity of exports could be offset by having to increase costs for consumers or lower profit margins. Thus, the unpredictability of trade can negatively impact consumer spending and confidence, along with business earnings expectations, giving investors pause.

Moody’s 2019 outlook for global sovereigns

Moody’s Investors Service said in a recent report about sovereign credit worth in 2019 is, at the moment stable, paired with the global economy. Slowing growth momentum continues against rising uncertainty over credit conditions and financial firmness over the next year to mid 2020! A number of risk factors could affect three-quarters of the 138 sovereigns that Moody rates currently, although presently has a stable point of view. Fifteen hold a positive outlook. Nineteen sovereigns have a negative outlook, compared to 22 a year ago.

The unwavering viewpoint for sovereign ratings in 2019 weighs the benefits of continued global growth against rising domestic and geopolitical risk. Despite the stable overall view, they hold a more mindful resolve than in previous years, as the potential for shocks disrupting economic stability in the next 12-18 months is greater.

Moody’s expects G-20 growth to have peaked in 2018 at 3.3% before slowing to 2.9% in 2019. For advanced economies in the G-20, Moody’s believes growth will fall to 1.9% in 2019 from 2.3% in 2018, mirrored in key economies, including the U.S. and Germany. The picture in G-20 emerging markets is more varied: their growth in 2019 will be meaningfully slower in 2019 than in 2018, at around 4.6% against 5.0% in 2018.

The window is closing on global sovereigns to adequately resolve long standing high levels of public and private debt challenges, as well as those relating to ageing and inequality!

High debt, declining growth and an increase in interest rates expose sovereigns to the risk of shocks that undermine the availability and sustainability of debt. A number of new and border markets are particularly susceptible to the tightening of global financial conditions and increased trade protectionism in the United States.

Throughout the world, the long-term credit history of sovereigns will depend on the success of reform efforts that address these vulnerabilities.

As in previous years, the potential for domestic or geopolitical disruptive events represents the greatest risk of queuing. Geopolitical risks could have implications beyond the economic and fiscal fundamentals of a particular country and affect cross-border capital flows and, therefore, financing conditions for many sovereigns.

Geopolitical risk is a broad category that encompasses US trade and foreign policy which poses an increasingly far-reaching threat to global confidence and growth; conflict on the Korean peninsula; regional conflict in the Middle East; and ostensibly domestic political events, including Brexit and recent events in Italy all have a bearing on what kind of turn economies take within the 12 to 18 month time frame.

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