One of the most talked about topics in the financial industry right now is the deflationary environment in the usa and the measures taken by the Given to counter it. At the same time, many in the financial world are lauding the attempts of Japan’s Prime Minister, Shinzo Abe for his attempts to pull the country of its prolonged recession. However, there are many others who criticise such measures for their inefficiencies to drive real economic growth. In order to understand the economic condition of any country it is important to understand the objectives of central banks’ policies and the effectiveness of their tools which are implemented. From an investment point of view, it is really of prime importance to how these tools impact the market.
The monetary policies of a country relate to the quantum of money supply and monetary policies are related to the public finance of the country. Each place’s Central Banks along with its Treasuries try to change the interest rates and money supply in order to control the Standby Letter of Credit. economic activity and safeguard the national currency against extremities. Any mismatch in the currency’s valuation with the rate of interest on borrowings will provide for a good arbitrage opportunity and the market will interact with correct this. Also, since the financial markets are a subset of the entire economy of a country the policies have direct affect the performance of the financial instruments as well.
Though there was considerable involvement by the central banks prior to 08, the 2008-financial crisis has led to increased scrutiny of the financial markets by Central Banks. Various measures by the public authorities to bring back the economic condition has only led the advanced nations in deeper into recession. This is mainly because the stimulus offered by the public authorities to propel economic growth has increased liquidity without an equivalent economic activity. It’s driven the value in financial markets higher creating a deep detach between economic growth and financial markets. This disconnection between the economic activities and financial market movement can be fixed as long as the markets are allowed to operate freely without the involvement of the central banks. However, ordinary scenario, investors may loose both their expected returns and capital.
In case of bond markets, the record low interest rates worldwide and high liquidity have driven the costs of bonds. Assure have reached record low levels, and any increase in the rate of interest or fair play of supply and demand in the market may erode enormous amounts in principal. Hence it is advisable for investors to be selective in picking their investments. Though there are different bonds you can find with similar ratings, the investors must be cautious to understand the impact of the policy changes on each issuer. It is advisable to hire financial consultants who would help investors understand the various risks associated with each borrower. Financial consultants are also equipped with skills to understand the various wealth management opportunities you can find.