There has been much talk lately of a government shutdown, and for good reason. Politicians in Washington are still debating what to do about the looming debt-ceiling crisis, with Republicans still pushing for the defunding of Obamacare in order to make things work. The biggest loser in this battle? The stock market.
Despite the high numbers reported for the month of September, the stock market has taken a blow, mainly due to the bickering in D.C. With the uncertainty of what decision the federal government is going to make concerning the looming shutdown, investors are starting to shed their risk-making policies.
So, where are investors turning? Bonds. This week, bonds saw their biggest price gains since July 2012, with 10-year notes rising 4/32 in price and 30-year notes rising 7/32. The biggest investor in the US market, China, bought record amounts of US bonds and mortgage back securities in July, increasing its holdings by $20.2 billion.
There are several reasons why so much attention is being given to the bond-market currently. First, bonds generally act inversely to stocks. Thus, when stocks are bad, bonds are good. With the continuing debacle over government shutdown in Washington continuing to affect stock-investors, investment in bonds makes sense.
If the government was to actually shutdown, investment in bonds would be the best financial move possible. With shutdown comes no discretionary budget, meaning the federal government would have to stop expenditures on contracts, subsidies, and indirect payments to defense contractors and technology companies. This means lowered forecasts for said companies, and reduced stock activity. The thought of the US not paying its bonds debts would seem absurd considering how much government debt is owned by foreign countries, such as China (who currently owns $1.277 trillion).
All signs also point to the fact that fewer bonds will be available in the future, mainly due to the drastic cuts in the deficit that have been made – from $1.089 trillion to $700 billion over the past year. If sequester spending continues, along with increased taxed, the deficit could be reduced even further, leaving fewer bonds available for purchase. As the law of supply and demand dictates, less supply and higher demands results in higher price yield.
Bonds themselves have three main advantages. The first is that bonds represent capital stability. As previously stated, the government is not likely to default on its bonds payments anytime soon. The second advantage is that bonds offer more liquidity than other investments. The return for bonds on the secondary-market is essentially equal to the primary market. The last advantage of bonds is that they come with a fixed interest-rate that is locked-in for the duration of the bond. With the instability of the current US market, a stable investment makes sense.
In short, buying treasury bonds today is as sure of a bet as putting some money on Barry Bonds was back in 2001.
Image via Wikimedia Commons
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