Company Bonds to overtake Government Bonds?

For decades, government bonds have been regarded as relatively risk-free, at least when they are issued by solid western countries. Amidst the current financial turmoil involving the US economy and the Euro-crisis, are we to witness a dramatical change in perception?

Before the crisis, Elena Moya of the Guardian points out, it was almost unthikable that a “solid” European country like Greece or Ireland could go bust, thus their bonds were regarded as almost risk-free, despite having a multiple yield as compared to e.g. German bonds.

Now, as we well know that countries in fact can go bust, will bonds issued by huge companies like IBM, ConocoPhillips and Volkswagen, who have revenues above the GDP of a lot of smaller countries, be regarded as less risk-laden as they apparantly do a better job than official economists, politicians and reserve managers (check out these two videos of companies shaking off the crisis: One, two)?

I think there are two major factors which speak against it:

1. As Gregory Zuckerman of WSJ.com comments, all private bond issuers are always tied to the current interest rate of their reserve bank by adjusting themselves to its rate to secure their own solvency in regards to their bond.

2. In the current environment of extremely low base rates, each private bond issuer has to refinance its debt with the issue of low interest bonds, taking advantage of QE2- as has recently happenend with IBM and Johnson & Johnson, says Jesse from Jesse’s Café Américain.

Therefore, I think that short-term company bonds may return a higher yield than government issues for some time to come, but because of their dependancy on the reserve banks rates they do not represent a viable long-term macroeconomic alternative to government bonds. We will just have to pick those government bonds more carefully in future!

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3 Responses to Company Bonds to overtake Government Bonds?

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

  2. rudi2020 says:

    Citing fromthis blog : “Company bonds from the U.S. to Europe and Asia have returned 9.7 percent this year on average, according to Bank of America’s Global Broad Market Corporate & High Yield Index.”

    My knowledge of company bonds and government bonds is limited, but just looking at the returns, in one year! I would go for company bonds in any case. Why waiting for a good return for 10 years or more?
    Honestly, we dont know what tomorrow brings and less we now what the day after tomorrow brings.
    Short time investment with high ROI is the word. Thats why I would only invest in a country if I was actually another country, which I am not (yet). Last I remember was Louis XIV.

  3. olexa5 says:

    Overall, it seems it is difficult finding a reliable long-term investment like government bonds used to be in the phase the economy is right now. An alternative could be found in government bonds of emerging countries, though experts warn to take care of other risks due to the uncertain development.

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