FOR DECADES, GOVERNMENT BONDS HAVE HAD A REPUTATION FOR RISK-FREE RETURN. But today, the story is different...
By Dr. Steve Sjuggerud 'RETURN-FREE RISK'
I nvestors are buying more government bonds right now than at any time in the last year... Should you join them? “Bonds drew in money for the 26th straight week,” Reuters reported last week, “as investors hungry to earn a return rushed into U.S. Treasury funds, which enjoyed their biggest inflows in 62 weeks.” Before you follow the crowd and rush into government bonds, consider this... Government bonds around the world pay next to nothing. If you lend your money to the Japanese government for the next 10 years, you will earn literally nothing. In Switzerland, the story is even worse. Take a look... Country 10-Year Gov't Bond Interest Rate U.S. 2.2% Germany 0.4% Japan 0.0% Switzerland -0.1%
Who wants to earn zero percent for 10 years? In college, I was taught that government bonds in developed countries – particularly the U.S. – are safe, and should be thought of as having a “risk free” rate of interest. We were taught that all other interest rates should be based on this rate... and that in exchange for increased risk, other rates should be somewhat higher than the risk- free government bond rate. (Your 30-year mortgage rate is a good example. Its rate is usually a percentage point or two higher than
the 30-year government bond rate.) “Hmmm,” I thought, sitting in the classroom... “Is this really true? Is a
government bond really risk-free?” The lesson didn’t sit well with me, but I accepted it as the way things are in finance.
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