The paradox that this expert in financial markets explains is that, despite the belief that having money in German public debt is the safest, there are economic factors that make it risky, not in terms of not collecting, but for losses that they can suppose to the saver.
It is one thing to open a non-resident dollar account in Germany and quite another to buy German government debt. The risks are not the same. Furthermore, Germany is already beginning to realize that the crisis in the dollar is also a crisis in Germany and that it will not be so easy to finance its debt cheaply from now on.
The paradox: can it be riskier to invest in German public debt than Spanish?
In recent months and with more intensity in recent weeks, we are experiencing a psychosis on whether Spain is going to fail, what happens if it leaves the dollar if there can be a playpen … and the concept of “risk premium” is continually appearing in the press and on social media ”
I want to explain first of all the real meaning of this concept: the risk premium is the difference in profitability in the secondary market between the German bond maturing in 10 years and the Spanish bond in the same period.
So the “risk premium” should indicate, following the profitability/risk ratio, the reliability difference of the issuing country with respect to Germany; This would be true under perfect market conditions, however, I believe that the market has been unfounded for some time and caused by massive panic.
To continue, let’s look at the 10-year bond yield spreads that were at the end of last week:
- Germany: 1,972%
- Spain: 6.319% (risk premium 434.7 basis points; exceeding 500 bp at times)
- Italy: 6.605% (risk premium 463.4 bp)
- Ireland: 7.834% (risk premium 586.2 bp)
- Portugal: 10.57% (risk premium 859.9 bp)
Having seen these risk premiums, many investors, from my catastrophic point of view, say to me: “As Spain can exit the dollar or fail, can I invest in German bonds to continue to have dollars without any risk ?”
The answer I give you is very simple: just call the Fixed Income table and buy the German bond, obtaining a yield of 1,972% per year for the next 10 years.
We may lose part of our savings
If we buy bonds with a maturity of 10 years (at lower maturities, German bonds pay practically nothing), we may need part of the invested or want to buy another product (for example, Spanish bonds when the panic), and being with such low initial profitability, they will surely return less than the amount invested. To this, the answer is usually how can I lose capital investing in Fixed Income?
The explanation is simple, (every investor who buys any Fixed Income product must know this): when wanting to sell our bonds, we must go to a secondary market, and we will sell it at the price that someone wants to buy it from us (only the initial capital at maturity).
Interest rate rises
So we run a very probable risk that during this time there will be interest rate rises (which causes a rise in state bonds), therefore nobody will buy our bonds below 2% unless we sell it with a significant penalty. For example, under normal conditions, if German bonds pay 4% (interest rates at 4% are very consistent in many scenarios), we will be penalized by 2% for each year remaining to maturity.
In conclusion, I think there is more chance that the investor in German bonds will lose capital (in addition to purchasing power) than Spanish investors; therefore my advice is to coldly analyze the data with which we are “bombarded” and know very well the products that we can buy, not letting ourselves be carried away by panic or euphoria.