Advantages
- Very safe security
- Flexible investment, as they can be traded on the stock exchange
- No minimum or maximum investment volume
Disadvantages
- Low or negative interest rates
- Only a few bonds available on the market
- Capital is tied up for the long term
Due to the undiminished high creditworthiness of the Federal Republic of Germany with a rating of AAA, the default risk of gilt-edged investments for investors is very low. Germany's liquidity is therefore very high.
In return, investors in government bonds receive only a low or sometimes even negative interest rate, which in turn can lead to a negative return. This reduces profitability in exness trader. This means that some investors have to pay the German state, for example with ten-year Bunds, money every year for lending it money.
Possible risks for investors
- Creditor risk: With creditor risk, the investor takes the risk that the debtor cannot pay the interest or the nominal amount or can only pay it in part.
- Interest rate risk: If the nominal interest rate falls below the interest rate level of the bond market during the term, investors may incur losses.
- Exchange rate risk: If the exchange rate of bonds denominated in foreign currencies falls, investors can lose money when they sell them or after the end of the term.
- Inflation risk: If inflation rises unexpectedly, this can cause a loss in the value of federal bonds.
Risk classes
The classification of financial investments into certain risk classes is intended to make it easier for investors to understand the risk of a financial investment.
Risk class and examples of financial products
- No risk - time deposit or call money
- Interest rate risk only - government bonds
- Interest rate or price risk - bond funds
- Interest rate and price risk - investment funds
- Possible total loss - shares or warrants
Outlook for government bonds
Investors must expect the yield on ten-year Bunds to remain negative or very low for the time being. This development is favoured by the European Central Bank's (ECB) extreme bond-buying policy and the ECB's low interest rate level.
The development could change if institutional investors stop investing so frequently in Bunds. A positive development of the global economy is assumed as a prerequisite for such a change. At the same time, higher oil prices as well as an increasing inflation rate should ensure that investors use other products for capital investment.
This is how Bunds in Europe came into being
After the end of the Second World War, the still young Federal Republic issued the first federal bond in 1952. The bond volume amounted to half a billion Deutschmarks. The money was used for reconstruction, for example. The first Bund was also issued in two forms. Originally, interest was paid on Bund twice a year. Since 1971, interest has only been paid annually to the bondholders.