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.
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.