TAGS: #brexit
Most of 401K and Roth IRA account are diversified into US Treasury bonds and yields have plunged for more than 20 years now. Interest rate is a key indicator of the economy, as they represent the mindset of the people. Spending money does not confer growth because spending deplete resources and capital needed for new businesses.
The reason bond yields have gone down is because the central bankers around the world printed money out of thin air and flooded the financial markets and the economy with new money. The interest rates were artificially lowered during every financial crisis since 1971. How would an economy run on zero interest rates? This means people who save money don’t get any return on them.
Central banks constantly monetize government treasuries to finance the government. This causes inflation of asset prices, central bankers are the enablers of government debt. Bank of England recently restarted the QE program after the Brexit, during the bond auction many financial institutions failed to turn up for the auction. ECB has been purchasing every bond across Europe and financing the budget deficit countries. German bond yields are trading near zero percent.
Bank of Japan has been monetizing debt for years and yet there is deflationary pressure in the economy because japan exports most of its product abroad and they convert the monetized Japanese bond to buy the US dollar and treasury to keep the value of yen competitive for the export of products.
Most of the countries have national debt exceeding their GDP but what is sustaining the debt is the production in the country but at one point of time debt wins out causing havoc. Once the central bankers become the net buyer of bonds, there will be carnage in the currency market where investors and people scramble to sell the bonds as the yields plunge but the currency value will also plunge along with it.
Countries which had budget surpluses with America are unloading their US treasury holding, as they understand US debt is raising to unmanageable levels and pegging their currency with the dollar would cause severe devastation to their countries. Saudi and China are the front-runners in dumping the US treasury bonds.
Chinese Central bank (PBOC), Indian Reserve Bank and Russian central bank have actively reallocated their foreign reserves since 2009 crisis, they have become the net purchasers of commodities especially gold. Gold acts as a hedge against the dollar collapse; most of these countries hold trillion of US treasury and dollar denominated assets.
There are lots of events which can have significant impact on the bonds ranging from Brexit- invoking of article 50, EU debt crisis, QE programs from the central banks, Acknowledgement from the fed that the US Economy is weak, Japanese bond crisis etc. A lot of turmoil lies ahead but one form of currency holds protection against the reckless monetary policies. Gold is an inflation hedge and protects your purchasing power. Physical gold can be purchased in Roth IRA and Self Directed IRA.