Risk in financial markets may conceal itself in places that aren’t obvious: take government bonds.
Governments tend not to default in their own currency, so they are certainly free of credit risk, but even as they borrow more, real yields remain very low for investors now starting to worry about inflation.
That is largely thanks to central banks deliberately supressing the cost of servicing government debts.
At the start of January, 10-year Bunds offered buyers a negative -0.605%. Investors had to pay the German government for the privilege of lending money to it.
That’s a very sharp knife if it lands in your hand the wrong way
At least the 10-year US Treasury offers a positive nominal yield, though this was just 0.917 at the start of the year and so below inflation.
For investors, holding a portion of any portfolios in cash at low or negative real yields hurts their performance. And so, the pressure mounts either to take more credit risk, where spreads already look quite compressed, or extend duration.
In the past, Christoph Kruecken wrestled with this problem as head of liquidity management EMEA at UBS Asset Management and before that in various roles in liquidity management at BlackRock.
Kruecken
