Economics question (economic growth)

[Jeorg]

Since economies are growing at slower than anticipated rates, what impact would have on the valuation of fixed income securities such as bonds?

 

[uscitizen]

What kind of bonds?
There are many types.

 

[Jeorg]

Just plain vanilla fixed-coupon bonds. I know that the cash flows of bonds won't change given slower economic growth (unless they are linked to inflation) so I am assuming that only the discount rate will change. But I am unsure how slow economic growth will change the YTM?

 

[expat_panama]

Since economies are growing at slower than anticipated rates, what impact would have on the valuation of fixed income securities such as bonds?

Two things affect bond values:

Interest rates; if interest rates are 10% then a $10,000 bond that matures next year is worth $9,090,91 today. If interest rates change to 9% then that bond is worth $9,174.31.

Risk; if a $10,000 bond has a one percent chance of default then the bond can be sold for $9,900. If times worsen and the risk now looks more like a 2% chance of default then the bond's value just dropped to $9,800.​

 

[william the wie]

What is your time horizon? Ex-pat gave you the answer for the next 90 days but age constellation of the population and asset allocation fashions also count but more over a period of years. In the US I would expect equities and real estate to decline until 2023 while bonds and precious metal rise in the same time period. That is simply due to the size of birth cohorts over the last 75-80 years in the US

 

[waltky]

Granny says, "Dat's right...

... dat's the Donald...

... Makin' America Great Again."

US economic growth hits fastest rate since 2014

27 July 2018 - The US economy grew at its fastest pace in nearly four years in the second quarter, expanding at an annualised rate of 4.1%, official figures show.

The gains were driven by strong consumer spending and a surge in exports as firms rushed to beat new trade tariffs. US President Donald Trump described the acceleration as "amazing", claiming it as proof his policies are working. But many analysts cautioned that growth could cool in coming months. "In one line: Looks great; won't last," wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.

What boosted growth?

Friday's report from the Commerce Department showed consumer spending rose by 4% in the second quarter, up from the 0.5% rate seen in the previous three months. Exports also grew by more than 9%, the fastest rate since the fourth quarter of 2013. Economists say that figure, which contributed more than 1% to the GDP gains, was inflated in part by farmers seeking to get ahead of new trade tariffs on items such as soybeans. In July, the US and China imposed tariffs on $34bn of the other country's goods. Canada, Mexico and the European Union also imposed new duties in recent weeks on some US exports in retaliation for US tariffs on steel and aluminium.

Is this "amazing"?

The US economy expanded at an average annual growth rate of 2.2% between 2012 and 2017. That pace has picked up more recently after a long stretch of job gains that has driven unemployment to near record lows. President Trump said the White House had to "do a lot of things" to get the economy going again. He pointed to new tax cuts, de-regulation, increased government spending and the continuing trade negotiations. "We've accomplished an economic turnaround of historic proportions," he said.


While Friday's report showed the US economy accelerating, the gains were in line with analyst forecasts - and were not out of proportion with some quarters in previous years. In 2014, for example, the economy rose at an annual rate of 5.1% in the second quarter and by 4.9% in the third quarter. Compared with the second quarter of 2017, the economy grew by 2.8% in the April-June period.

What's the outlook?