Mark Fowler: Ten-year Government bonds, investment or insurance?

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COMMENT:

The last couple of weeks has been something of a rollercoaster ride for investors, with volatility spiking as the world and financial markets try to come to grips with COVID-19, and both the human and economic implications.

Unsurprisingly, we have seen a co-ordinated global central bank response. In simple terms, the US, Canada and Australia have all come out and lowered interest rates, with it widely expected that the United Kingdom and New Zealand will follow suit.

What has been somewhat lost in the ensuing chaos, is the yield or return of a New Zealand ten-year government bond is now ~1.00%.

Let's just think about that for a minute. Investors are prepared to lend money to the government (assuming they hold to maturity) for a period of the next ten years for a one per cent return. The European example is even more head scratching with the return on ten-year German bonds now falling to a negative -0.60%. In other words, you pay the government a fee to hold your money.

What makes this equation even more baffling is that in New Zealand inflation is tracking somewhere close to two per cent along with GDP growth. In a normalised economic environment, those two numbers alone would be key detractors when considering investing in long dated government bonds. Normalised economic environment times these are not.

At this juncture the notion of investors buying government bonds for a modest return is lost. More likely, government bonds are now effectively an insurance contract. A contract whereby investors believe they will get their money back, and the belief that there is liquidity to access their money if circumstances change.

A government bond is deemed the closest thing to a 'risk-free' investment and investors have flocked there on safe-haven demand. For many, knowing that their capital will be preserved far outweighs the thought of their capital being at risk seeking a higher return.

Risk and reward are terms often used when assessing the merits of a particular investment. For mine, short of negative interest rates, investing in a ten- year government bond in the current environment appears to be risk with absolutely no reward.

- Mark Fowler is the Head of Investments at Hobson Wealth Partners.