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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.
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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In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.
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