How do government bonds help with debt repayment

Government bonds : The world of debt

Rarely in history has it been easier for states to get into debt. If a country needs a loan, it issues government bonds. In many cases, however, the yield on these securities is now negative. This is good for the state - unfortunate for investors. Because a negative return means: You lend the state more money than you will get back later.

The situation in Europe

In Europe, around 75 percent of all national debts already bear negative interest. In Germany it is even 90 percent. If you also include corporate bonds with negative interest rates, according to the Bloomberg news agency, $ 13 trillion of money is stuck in investments that do not yield any returns, but cost something. Investors who lend 1000 euros to the state in this country have to pay 7.40 euros for each year if the loan period is three years. Even those who give the state a loan for ten years pays 2.90 euros per year.

So if you want more returns, you have to look outside the eurozone. For example in Great Britain, Poland or the Czech Republic. With this, however, investors also accept a currency risk, which with a little luck can turn into a currency opportunity. For example, those who buy bonds in dollars, zlotys, kroner or pounds could benefit from the fact that the exchange rate of the currencies is higher than that of the euro during the term of the bond. If, on the other hand, prices weaken between buying and selling, this would have to be deducted from the return.

Reasons for development

The yield on ten-year German government bonds already turned negative three years ago, but had recovered to almost 0.7 percent plus by the beginning of 2018 in anticipation of rising interest rates. Yields have been tumbling again for a year and a half. At the beginning of July they even slipped just below minus 0.4 percent, where the deposit rate for banks is at the ECB.

The falling rates clearly show that there is brisk demand. These types of bonds are bought for a number of reasons. On the one hand, some large buyers, such as insurance companies or pension funds, are legally obliged to put some of the customer money in bonds with good credit ratings. On the other hand, investors have bought who may generate a negative return on interest rates, but on the other hand rely on prices to rise. Because if the yields of new paper fall, there is greater demand for older bonds on the market: in proportion, they still yield a relatively large amount. So investors are willing to pay more for them. That is why the prices of the bonds rise whenever the yield falls. If investors buy in now, that means that they are speculating that the yield will continue to decline and that they will be able to sell their paper at a premium in a few months or years.

Some investors are currently doing so. One reason for this is the monetary policy of the European Central Bank. Experts speculate that they will, for example, further reduce negative interest rates for banks from minus 0.4 into negative territory. The forecasts of the analysts range from minus 0.5 to minus 0.75 percent. Stefan Bielmeier, chief economist at DZ-Bank, even sees a red line at minus 1.2 percent under certain conditions.


In the USA the situation is different. Not a single bond is currently yielding negative returns there. The ten-year-old throws off 2.09 percent - and demonstrates the confusion in the bond markets well. On the one hand, there is even 2.16 percent for short-term three-month bonds, but only 1.8 percent for two-year bonds. So soon-to-be rate cuts are factored in. On the other hand, depending on the rating agency, the USA has a very good to the best creditworthiness.

Greece and Italy

Greece, on the other hand, is seen as "junk". Nevertheless, Athens only has to pay 2.25 percent for ten-year papers, hardly more than the USA. At the beginning of the year it was just under four percent, three years ago even eight percent. Italy is also benefiting from the negative trend. The returns on ten-year money were still 3.8 percent in autumn 2018. Now investors only get 1.42 percent. For short-term money - bonds with a term of up to two years - Rome even receives 0.018 percent minus interest.

The US bank Morgan Stanley recently declared Italian government bonds in particular to be favorites. The future head of the ECB, Christine Lagarde, is expected to further cut interest rates and to return to bond purchases by the central bank. Italian bonds could benefit the most from this. Major Japanese investors looking for profitable targets have also announced that they will increase their stake in Italians.

In order to secure the low interest rates in the long term, Rome has just topped up a 50-year bond - at an interest rate of 2.8 percent. Despite this low return, investors put more than 16 billion euros into these bonds. Greece is also planning another loan after the change of government, the third since the end of the aid program last summer. The paper is supposed to run for seven years and could bear almost 1.6 percent interest.

Foreign bonds in euros

Other countries are also aware of the investment crisis in the eurozone - and are therefore issuing bonds in euros. The Saudis, for example, with an A rating, have just launched euro bonds with terms of 20 and eight years on the market for the first time. The interest rates are not lavish: two and 0.75 percent. For the normal investor, however, the bond is not suitable anyway, because the minimum investment amount is 100,000 euros. Egypt, which only has a B rating, had to pay 6.375 percent for a twelve-year euro bond.

Emerging markets

In any case, some investors are now switching to emerging markets. An average of six to eight percent returns await there - an indication of the associated risk. However, a study by a German-American research team at the Kiel Institute for the World Economy put the risks into perspective. The researchers examined the risk of hard currency bonds in 91 developed and emerging countries over the past 200 years. "Our empirical study shows that on average it is good business to lend money to countries in crisis, because the expected return increases with the risk of default on government bonds," said Christoph Trebesch, head of the International Financial Markets research department at IfW Kiel. “Payment defaults and debt rescheduling are part of the risk with government bonds, but investors are compensated for them.” Overall, the return was around seven percent per year, despite some defaults and country bankruptcies.

No data are available for bonds in (local) soft currencies. A currency is always referred to as soft when it fluctuates particularly strongly. Nevertheless, some fund managers believe that government bonds in domestic currencies, for example from Brazil, South Africa, Peru, Russia or various other countries, could have potential. On the one hand, quite a few currencies have recently lost considerable value, so that the risk of devaluation is lower. On the other hand, emerging countries are usually much less indebted.

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