The demand for risk loving investors in the bond business.

Bonds had the reputation being the first step in exchange market for orthonormal consumers, since they fitted to their especially risk averse behaviour. Though now the wind seems to have change and one will have to be attracted to more risky assets to favour bonds.

Two extreme worlds: Greek bonds have a yield of 10.4% and Germany’s have one of 1%. How is this reasoned? In theory, governments and companies issue bonds to finance projects, also even if this means the simple survival. Bonds are a kind of credit which investors give partially and receive a yield in return. The emission of bonds is initiated by the governments.

To gain the trust of investors this kind of financial instrument is rated, which signals the riskiness. The riskiness depends in the case of government bond on their economic situation. Meaning the more risky the situation, the worse the rating and the higher returns have to be offered to attract the investor.

In former times, bonds were seen as secure instruments to diversify portfolios. Though, after the EU crisis government bonds, especially Greece, Spain and now as well Ireland, have it difficult to draw investors if not offering a higher return as risk premium.

On the other hand, an article in the “Capital” magazine (12.2010 edition) regrets investors will find it difficult to find bonds with higher returns without the equivalent risk, as these like Germany’s don’t have the pressure to offer a higher return to attract them.

The new principle: To earn more on bonds, one will have to bear more risk. Who wants to own security, shouldn’t expect high returns.

Specialists advice to turn to emerging markets which have not been hit by the crisis as bad and report noticeable growth. Though, care has to be taken for inflation rate, as central banks could increase the base rate (recent example of India) and thus affect returns on old bonds.

Good times for corporate bonds: refinancing has never been as easy. Investors are seeking for alternatives to secure government bonds with hardly any return.

Supporters of free markets are motivated and bring up this scenario as a disciplining function where governments are punished for being reluctant in debt management.

As the future is more uncertain than ever, experts inform in the “Capital” magazine to leave long-term investments in government bond to specialists. Even more are they convinced of this, as states are thinking about including private creditors in further rescue action.

“Capital” advises investors to prioritize constant observations. Bonds are no more an investment which can be bought and left to fruiten without being regularly alerted.

Still most will probably not waive the advantages of bonds, namely the regular payments with which planning is enabled

Last but not least, Ireland’s recent news have influence investors faith in the security of bonds within the EU.For an update visit a former post: “The weakness about the EU bailout procedure”.

Investment circles believe the market wont carm down till end of 2012. Lets see how Irish bonds react to their debt management plan coming up in the next few days.

This entry was posted in Financial crisis and various bubbles to be continued and tagged , , . Bookmark the permalink.

4 Responses to The demand for risk loving investors in the bond business.

  1. vivipre says:

    That’s a very interesting topic.
    Investments in EU government bonds could be even more discouraged.
    The New York Times reported yesterday, our German chancellor Angela Merkel just proposed “rules that would require private bondholders to pay some of the costs of future bailouts” and the chief strategist at the brokerage FxPro in London sees a definite implementation of those regulations.
    Considering the given risk, I am also of the opinion higher returns could be achieved by rather choosing investment targets other than EU government bonds.

  2. rudi2020 says:

    The term “speculation” in combination with “bonds” was not what the creators of bonds had in mind. Looks like we are facing new times: “F-rated” bonds, standing for highest risk possible. Looks to me as controverse as buying a Skoda for having fun with a car.

    Check out this old school add for Aussie Bonds from the eighties.

  3. Pingback: Will Germany kill the euro? | BraveNewFinance.

  4. Thank you for this post.
    As far as I am concerned, I am sharing the investment circle’s opinion. I am afraid that Spain and Portugal will follow as being rescued but I do not hope that this hysteria will last until 2012.

    Moreover, one must be troubled to realize how influential these rating agencies still are. The post mentions the influence on bond yields, but one should not forget how ratings can be "instrumentalized" in order to manipulate exhange rates.
    For more information, have a look at one of our previous posts called Ring the bell for the next round.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s