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WSJ: World's Safest Bonds Are Actually Wild Risks

WSJ: World's Safest Bonds Are Actually Wild Risks
(Don Bayley/Getty Images)

By    |   Thursday, 19 May 2016 09:27 AM

It’s been essentially an investor’s urban legend that government bonds are one of the safest investments around.

But the playing surface has changed and now some of these arguably “risk-free” investments really do have hidden risks, The Wall Street Journal reports.

“Desperate for yield, investors are buying government bonds that come due further and further in the future. If you lend your money to the government, you expect to get it back. What could possibly go wrong?” the Journal asked.

“Unfortunately, a lot. A small move in the yield on these increasingly popular 40-, 50- and sometimes even 100-year bonds can have a crippling effect on their capital value,” the Journal said.

“Anyone who might sell before they mature (hint: that’s everyone alive today for the longest-dated bonds), should consider how they'd feel if their supposedly safe bond had lost a quarter of its value in two months. It happened to the rock-solid German 30-year bund, just last year,” the Journal said.

To help predict the future, the Journal offered an interactive calculator to let you play with interest rates and see just how big an impact changes to yield can have on the price of long-dated bonds.

Meanwhile, as Federal Reserve Bank of San Francisco President John Williams says that two or three interest-rate increases this year still make sense, Steve Major, head of fixed-income research at HSBC Holdings Plc, said that the market is signaling a risk of recession through the so-called flatter yield curve, Bloomberg reported.

The yield difference, or spread, between Treasury 10-year notes and two-year securities held near its lowest closing level in 8 1/2 years as a muted global inflation outlook encouraged investors to take more risk in the form of longer-dated government debt.

“The yield curve itself signals that things are not good looking into the future and talking about recession risk,” Major said in an interview on Bloomberg Television’s “On the Move” with Guy Johnson. “The market is now ready for a long, long time with very low rates and it’s been painful because people have been expecting the Fed to do what it said it was going to do. The Fed really wants to hike rates but can’t.”

(Newsmax wire services contributed to this report).

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It's been essentially an investor's urban legend that government bonds are one of the safest investments around.
bond, invest, risk, world
Thursday, 19 May 2016 09:27 AM
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