How safe are Government Bonds?

How safe are Government Bonds?

It is widely held that government bonds are a safe investment – after all, you get your money back at the end of the term plus interest, fact.

This is certainly true in the actual pounds and pence you will receive, but what is the real return, relative to the latest UK inflation figure of 2.1% per annum, released today.

If you invested in a 10 year UK government bond today, the annual yield you would get over the next 10 years would be approximately 0.45% p.a. Looking at the graph below, you are therefore guaranteeing yourself that the purchasing power of your money will be less than you started with.

Therefore, you would have lost 15% in real terms if you had invested the £1,000 over the 10 year period.

Obviously, this is based on inflation and bond yields staying where they are, and while these will move over time, there is still a high probability you will lose money.

So why would investors still buy government bonds if there is a high probability they will lose money in them?

Firstly, bond yields have been falling over the last 12 months because investors are worried that the UK and the global economy may be entering a recession. They therefore want to be in a ‘secure’ investment where they will get back the majority of their money, as opposed to stock markets, which will fluctuate in value a lot more over the short term.

Secondly, governments around the world continue to support government bond markets, by buying up a large part of the market on a monthly basis. Because of this, investors happily buy bonds, believing they can sell onto someone else or the government in the future at a profit if yields continue to fall.

Our investment strategy is to invest clients’ money over the medium to longer-term, and while we maintain a small position in bonds for diversification, we won’t increase our exposure until we are sure we can generate real returns over and above inflation for our clients.

If you want to find out more about how we plan your personal investment strategy please get in touch via our Contact Us page or via the telephone on 028 90221010