The old rule is broken: not every government bond is a conservative investment
Inflation, large deficits, and growing financing needs are pushing governments to raise debt at higher interest rates. In this situation, even government bonds can fall sharply - and sometimes bonds of strong companies offer a better alternative.
For decades, there was a simple rule of thumb in the capital market: stocks were considered the risky part of the portfolio, and government bonds the safe part. The investor lends money to the state, receives interest in return, and assumes that the government is a borrower that can be trusted.
But according to Nir Isaiah, CEO of Edmond de Rothschild Israel, which deals with investment and asset management, this assumption is no longer a given.
"The combination of inflation, large deficits, and growing financing needs forces governments to raise more money, precisely at a time when interest rates are higher - and the very fact that it is a state issuing the debt no longer guarantees peace of mind for investors."
This is already evident in the markets. The yield on the 10-year US government bond reached 4.74%, and the yield on the 30-year bond climbed to its highest level since 2007. In Europe, yields have also risen. This means that when investors demand a higher yield to lend money to the state, existing bonds that offer lower interest rates lose their value. Therefore, even a government bond can suffer from sharp declines.
According to Isaiah, the problem is that governments need more money just when money becomes more expensive. Security expenses, infrastructure, benefits, and interest payments on existing debt increase financing needs, and as the state issues more bonds, investors can demand higher interest rates from it. From this comes a conclusion that once sounded almost contrary to conventional logic: not every government bond is safer than a company bond.
"Not every government debt is necessarily the most conservative choice, and not every corporate debt is necessarily the risky side of the portfolio," says Isaiah.
According to him, there are large companies with stable cash flow and strong balance sheets, while states are dealing with deficits and long-term liabilities. Therefore, at Edmond de Rothschild, they currently prefer corporate bonds over government bonds in some cases.
"The change is mainly in the way of thinking. In a world of high public debt and significant interest rates, one can no longer be satisfied with the label 'government bond'. One needs to check who the borrower is, for how long they are being lent to, and what the return is for the risk," concludes Isaiah.
