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Government bonds: safe haven or danger zone?

Following last year’s focus on the eurozone bond market and a rush of money into UK gilts we ask what’s in store for government bonds.

Government bonds: safe haven or danger zone?

This is the third of a four-part series of articles on investing in bonds: see previous articles on index-linked gilts and emerging market bonds.

The eurozone crisis dominated government bond markets last year and 2012 has started with a bang, with France losing its AAA credit rating in a wave of sovereign debt downgrades across the region.  

Yields on bonds issued by some troubled eurozone nations climbed to what were described as unsustainable levels, reflecting investor concern that they might not get their money back. Meanwhile, conversely, yields on UK government bonds, or gilts, dropped to record lows as investors ploughed money into the country’s debt as a bolthole from the rough and tumble of the eurozone.

In the US, yields on government bonds, or Treasuries, also hit surprising lows last year as investors brushed off a downgrade of the US credit rating and instead treated Treasuries as a safe haven.

But with national debt troubles lurking in the background just how safe are government bonds and what is in store for the year ahead?

Eurozone bond extremes

Bond markets have already taken a turn for the strange this year with negative yields on short-term German government bonds, or bunds. This means investors are effectively paying the German government to hold their money. 

Although the rates sound like good news for Germany, they tell of the very real fear gripping the region where markets are so unstable.

David Zahn, fund manager of the Templeton Euro Government Bond fund, says: ‘I think that the negative yields you’ve seen on the German short-dated bonds is really just driven by people looking for something they’re sure they’ll get their money back on.’

In Greece yields remain stubbornly high, with one year bonds giving returns of over 450%, the country’s government is unable to keep up with its debt repayments and are asking investors to take a cut on their returns.

Geoff Hitchin, fund manager at Marlborough where he oversees the Global Bond fund with investments in corporate and government bonds, says: ‘I am holding some sovereign debt, including US Treasuries and German, Dutch, French and Irish government bonds.

‘Despite the yields on offer, I am not tempted by the bonds of Greece, Italy or Spain as things stand. There may come a time when they present opportunities, but the risks still outweigh the potential rewards too heavily.’

However with such low yields on offer in some eurozone countries, investors could struggle to get a solid return on their investments.

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16 comments so far. Why not have your say?


Jan 23, 2012 at 07:15

Undated stock like War Loan has risen excessively on redemption hopes. It fizzed up a couple of times in the last two years but subsequently fell back to the £72 - £80 range. Against banks the gilts are probably competitive, but on a long term view they are horrible versus 90% of common shares which on valuation terms assume that forward pricing of gilts will be lower. Thus, my view of gilts is potential capital loss and below inflation income.

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Jan 23, 2012 at 09:03

An enormous BUBBLE that will burst in the near future. The trigger might be Greece deciding to impose "haircuts" on the private bonholders. If they do that then all perpheral European debt is toast. Sovereign debt will have lost its "risk free" status for a long long time. All of the financial system keys off the assumption that government debt is risk free; if that is undermined then we are indeed in new territory as all the mathematical models behind the scenes will have become null and void.

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William Bishop

Jan 23, 2012 at 10:00

Easy to agree that the limited range of government debt that is still considered to be a "safe haven" is significantly over-priced on a long-term view, not easy to see if/when it will cease to be sought after in the shorter term. The latter part of TruffleHunter's comment is insightful, but surely the current situation with Greece must be largely "in the market" already.

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Jan 23, 2012 at 10:09

The best comment I've seen on this is Roger Bootle's in the Telegraph Business section.

I remember when War Loan hit 18.75 so to see it at near par is quite astonishing. War Loan had a 5% coupon until 1932 when it was reduced to 3.5%. Why on earth would the Government wish to redeem it? If long term interest rates were to fall to the sort of levels seen in Japan the implied price would be nearer 300 so HMG might be tempted to offer redemption or a lower coupon. In those circumstances holders would prefer the latter.

So, whilst current prices may be unsustainable in the long term (15-20 years) there is a case to be made for them over the next 5 years.

If we are about to enter the equivalent of Japan's lost decade that would imply GDP growth of 1% pa making equities yielding 3% or more in companies with strong balance sheets more attractive than gilts.

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Jan 23, 2012 at 11:46


The difference between Japan and the West is that the Japanese Government has been able to raid the capive savings(Japanese Post Office) of Mr and Mrs Watanabe to finance the government borrowings. The problem for the West is that their are not any captive savings banks to raid.

I agree dividend aristos of the corporate world are the place to be.

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Jan 29, 2012 at 18:12

There is one way forward in future with goverment bonds to keep them more stable for the buyers and goverments and that is to have a fixed channel of what a paticular bond can move within a high and a low price .the bond protection for the buyer the low price the high price would create plenty of buyers and sellers within the time scale of the bond .

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Jan 29, 2012 at 19:55

A sort of enhanced Eurobond Ponzi scheme eh?! It would be a totally artificial structure. Another example of government distorting the natural rythm of the market. I suppose they could sucker some poor widows and orphans.

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Jo Kerr

Jan 30, 2012 at 09:17

With US Govt spending $3.6tr against tax receipts of $2.3tr and debt of $15.3tr, sustainability of this model is questionable. Add to the cauldran large increases in money supply via QE which will drive-up inflation / interest rates, and we have a rather toxic brew developing.

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Jan 30, 2012 at 10:34

Thanks to a decade of government incompetence a new cycle is dead ahead. The post -WW2 wealth creation(based on increases of debt) for the West is becoming poverty creation as the debt super cycle collapses.

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Jan 30, 2012 at 16:29

I can see Freddie Forsyth writing a thriller on the toxic debt cycle with China locking the West in a 'half nelson' as its main creditor.

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Jan 30, 2012 at 16:58

We are heading into, as the Chinese say, "interesting times". The money printing will continue in USA,Europe and UK in order to boost nominal GDP into positive territory to create the illusion that we are growing.

Governments are finally having to acknowledge the mathematical certainty in the following equation:

GDP=Consumption+ BusinessInvestment+ GovernmentSpending+ (Exports - Imports). This nets down to Savings=Investments.

Savings of business and consumers equals Business Investment - but the little nasty is that the savings are also financing the Government!!!

This is a seriously thick brick wall that lies dead ahead. The money printing will help devalue the currency to encourage exports. Exports are the only other path away from the brick wall. Problem is everyone else needs to adopt the same strategy! Conclusion: standards of living are going to fall in the West.

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Jo Kerr

Jan 31, 2012 at 12:49

Debt forgiveness is required.

Whether this is by straight-forward debt cancelation for the more acute situations such as Greece or increased inflation for less effected cases, it will amount to the same thing; Treasury bill holders in real terms will get negative returns. Inflation does give us time, but comes at a cost.

Whilst Europe has had a lot attention of recent, it is a prelude to the main event. With the increase in US money supply over the last couple of years, inflation will increase by 2014 from its current and historic average of 3.4% and naturally investors in new issues of T-bill will require compensating for this. The US government’s current average interest rate (1.5% and lower for new issues under 10-years) is artificially depressed, given its safe-harbour status, courtesy of Europe. With increases in inflation and a T-bill maturity profile of over 70% under 5-years, we may well see a material increase in average cost to the US tax-payer. If at that time, Europe has not sorted itself out, the future may be less investable than today, outside of commodities which of course will add to inflationary pressures. However, I would not rush into the yellow stuff just yet as the US government has 290m ounces of it and may well intervene given its adverse correlation to sovereign confidence.

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Feb 08, 2012 at 10:28

If the Germans paid back with interest the money they stole from Greece in WW11 a lot of the problems would be solved.

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Feb 09, 2012 at 20:48

Is this a good time to sell War Loan, many years ago i inherited a few 1000, when they were 30ish and have just collected the dividends. Now they are near par and therefore yielding 3.5% which i can easily beat, should i sell and how do i do this? I cannot do it on-line with H-L and the diffeence between the sell and buy prices on their site is absurd anyway.


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Truffle Hunter

Feb 09, 2012 at 21:47


The Post Office used to buy and sell for a very small fee - not sure whether they still do. Failing that have a look at the website for the Debt Management Office. It might point you in the right direction.

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Feb 13, 2012 at 18:18

Post Office handed over to Bank of England in 2002, who in turn handed over to Computershare, see

There are downloadable forms but not ones that my Mac seems to recognise. Good luck.

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