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!