Understanding Gov bond investment risk

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Troy McClure

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I was reading in a sunday paper yesterday about investing in government bonds. It suggested that those who bought Irish gov bonds at the begining of the year are 6% down on their capital, if they were to sell today, because the yields have widened. I am guessing they may be 10 year bonds. That makes sence I guess.
Irrespective of what country you buy bonds in I never considered the loss of the investment capital when it came to gov bonds. I am considering putting a certain amount of money into German gov bunds. There is a department of the german government that deals with this. They explained, where you put your money into a non defined term bond which can be bought and sold anytime (never heard of this before), that your capital is safe with the rate flucuating. The rate is pitiful but I accept that as it's not my motive.
If I held german bonds is it possible my capital investment be worth less if I sell in a years time?
 
The problem with government bonds is that the capital value can fluctuate if you sell before maturity.

Bonds are priced as a 100.00 unit. If you pick up a copy of the FT they show that some bonds are trading at 110.00 for instance and other at 95.00.

Bonds above 100.00 have increased in capital value and their yields have depressed. With the converse for bonds selling for less than 100.00.

The way to avoid capital loss is to hold until maturity but then you face the risk of purchasing power loss through an average inflation rate higher than the average yield over the holding term.

Government and Corporate bonds are not like the bonds that banks and building societies issue where the only potential loss is a loss of purchasing power and not capital loss for those who sell before maturity.

My personal opinion is that you have to be crazy to buy government bonds at present. Having said that, being based in the UK we are facing inflation which is bad for bonds where as in Ireland there may be more deflation to make bonds a better bet.

Niall Fergusson in 'The Ascent of Money' has a good chapter on bonds - How they are priced, issued and how they can become worthless!

Please do your own research.
 
thanks folks.

My concern at the moment is Ireland been in a position where it is basically forced out of the Euro and I want to have savings where it's current value is secure. If Ireland pulls out of the euro it will devalue overnight. I am looking at German bonds not Irish bonds obviously. There is bound to be inflation in Germany and bond yileds are very low, but is this an issue for an Irish investor living in a country where inflation is likely to be flat investing in another country's bonds where there is inflation?
 
Can't speak for Euro bonds but for the UK and USA, the government bond bear market finished in 1981 following the 70s inflationary period.

Government bonds then went on a crazy, crazy bull market for 29 years to today!

Yields were 15% or so in 1981. They are now 1/6 of what they were.

IMO we are in the blow out, speculative phase. Is there any negative news on bonds at present in the daily press? Not from what I can see.

Joe public loves bonds. This is the time to be questioning the future long term course of the bond market. When everyone is in, its time to get out, or start thinking of doing so.

As for holding German bonds should Ireland pull out of the Euro, if the preverbial hits the fan then countries are going to put in place tight capital controls. Will it be possible to get easy access to foreign ownership?

I think this is a big potential risk in the future. Governments have a nasty habit of theft from their hard working savers when things go pete tong.

Argentina - nationalised pensions. US - Gold illegal, etc, etc.

Personally I want to hold my assets in safe havens - HK, Singapore, NZ, Aus if this occurs. Not Europe and certainly not the US!
 
If the preverbial hits the fan as you say, I dont think it will be an issue for Germany as much as other countries in the europe.
I thought about a Australian dollar account, but there are currency issues that could nail you there. (thought maybe Canada a better bet).
Gold is a bubble I think. What mechanism is there for someone who wants to protect their capital value, and is not driven by a return on capital but rather a return of capital.??
 
Ringleman,
The german gov introduced in 2008 a day bond where the interest rate flucuates daily. This would protect your capital as its more liquid. They can be bought and sold on any given day. Would you see any problems with this bond for someone like myself who wants to put money in a place that is secure for my capital amount, protecting it's value? I am not overly concerned about the interest.
 
Good questions Troy.

Risk is that if there is contagion which remains possible than periphery sovereigns will affect the core and Germany.

I am amazed by the continuing degree of complacency and it is like we have learnt nothing about the real financial risks (particularly monetary) still challenging us.

The same vested interests who were peddling Irish equities, CFDs, leveraged property funds etc are now jumping on the government bond (national solidarity bond, prize bond and whatever you are having yourself) bandwagon - anything for a commission.

This article on gold by the highly respected editor of Money Week and contributing editor of the FT may display your opinion that gold is a bubble:
[broken link removed]

as will this article in the FT last Saturday:
The True Value of Gold
http://www.ft.com/cms/s/2/e9378c6c-b0b8-11df-8c04-00144feabdc0.html
http://news.goldseek.com/GATA/1283234760.php

Diversification remains of paramount importance.
 
I know the argument about Gold (at least I think I do). Gold bugs say the price of gold from the 1980 price ($800) adjusted for inflation should be around $2400/oz today. but the fact is it was selling for around €300/oz only 10 years ago. How is that reconciled. There has to be alot taking it up for the short hop as many do on any bubble, to make a quick few bob. To what level this is underpinning it is hard to say though.
Are you not also exposing yourself to currency flucuations also?
The viewpoint in the article that politicians are surpressing the price of gold has to be a nonsence as it is too international a commodity for to organise overall trading in that fashion.
 
Err . . . I am no gold bug - not even sure what one is. You did not not address my points re diversification and went on a bit of an unsubstantiated tangent there.

The major buyers of gold today are not people "talking it up". Not sure who they are as I never here anyone talking it up in Ireland. Once heard Eddie Hobbs say it would be a good idea to be DIVERSIFED. And heard a Delta Index ad today - first ad I have ever heard advocating buying gold and is not even for gold rather a leveraged derivative gold contract.

Those buying gold are the smartest hedge fund managers in the world - Paul Tudor Jones, Paulson, David Einhorn and some of the largest central banks in the world - Russia, India and China - indeed central banks are net buyers of gold bullion again this year. Funny as the savvy Chinese keep talking down gold and then buying.
Similarly Soros recently said that gold would be the ultimate bubble and then the most recent quarterly filings showed that he again massively increased his gold holdings.

Gold is going up in all currencies including the reserve currency of the world - the dollar. The majority of our (Irish peoples) assets and savings are already exposed to currency fluctuations in the form of the euro (subject to risk). By owning gold you hedge your domestic currency exposure - whether that be euros, pounds or dollars.

As ever it is not an "EITHER OR" situation (equities versus gold; bonds versus gold; cash versus gold, equities versus cash versus bonds) rather it is important people look holistically at their investments and savings and DIVERSIFY them.
 
The term gold 'bug' I took from the articles you linked to George.

I am looking to put money in a safe place rather than trying to get a return.

As i said above the german gov have a day bond with flucuating rate so without a term you are protected from capital loss as per the example you gave. One of the reason I am interested.
 
Err . . . the first article was by the editor of Money Week and the contributing editor to the Financial Times. The second article was by GATA who you will hear about in the coming months and I suggest you read and educate yourself about rather than name calling and attacking the man and not the ball.

A bond that protects you from capital loss? Now that sounds like a free lunch and I look forward to hearing more about this mythical creature.

There is no "safe place" - all investment and asset classes including cash and German and US government debt incur risk.

That is why you have to be DIVERSIFIED.

Suggest you and other AAM readers do some research rather than making assumptions based on preconceived notions. Some of which have come out dated due to the continuing and deepening global financial and economic crisis.

Gold is not about getting a return. Rather it is financial insurance from the global financial casino.

[broken link removed]

DIVERSIFY
 
Err.. thanks for your input george.

Anyone who has experience of the German day bond, it's advantages and disadvantages I would love some feedback please.
 
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