Camille Van Vyve
04 Jul 2024
The state bond: a risk-free product, really?
State bonds are often perceived as risk-free investments, ensuring the security of the invested capital. This perception is reinforced by the confidence investors place in the government's ability to honor its debts. However, this idyllic vision overlooks several inherent risks associated with this type of investment. As the Belgian one-year state bond matures and 22 billion euros will soon need to find a new placement, let's explore the riskier facets of state bonds.
State: the unsinkable issuer that isn't
We sometimes tend to forget: a state is not infallible. And while the risk premium associated with each state bond theoretically reflects the issuer's solidity, few investors consciously consider this risk. No one should blindly trust states, especially in a context where the debt of many, including Belgium and France, but not limited to them, is reaching new heights. The near-bankruptcy of Greece is not that far behind us...
Inflation: the invisible enemy of state bonds
In a period of high inflation like the one we are currently experiencing, state bonds may not offer sufficient returns to offset rising prices. In other words, even if the investor does not incur a nominal loss, their purchasing power erodes over time. For example, the Belgian one-year state bond of 2023, with an annual yield of 2,81% in an economy where inflation exceeds 3% over the same period, results in a purchasing power loss of 0,2% of the invested amount. This erosion can severely impact the long-term financial goals of investors.
Maturity: the reinvestment conundrum
The maturity of state bonds is a crucial factor to consider. Short-term bonds, while minimizing interest rate risk, force the investor to quickly find a new investment solution, which is a source of stress. Moreover, this need to reinvest can be tricky if market conditions have evolved unfavorably. In a period of high interest rates with a downward outlook as is the case currently, the investor risks finding less attractive investment options at maturity, thus reducing potential returns.
Returns: state bonds vs. stocks
Historically, state bonds have offered significantly lower returns compared to stocks. Over the last century, stocks have yielded nearly 100 times more on average than state bonds. This difference in return is due to the fact that stocks, although more volatile, capture economic growth and business innovation. For an investor looking to grow their capital efficiently in the long term, stocks can be a wiser choice despite their higher risk.
ETFs: a simple way to optimize portfolio allocation
Depending on one's risk profile and investment horizon, it is advisable to optimize portfolio allocation to achieve the right balance between stocks and bonds. But which stocks and bonds to choose? ETFs help avoid this often arbitrary and ultimately inefficient dilemma. By selecting a global stock ETF and a Eurozone bond ETF, the investor maximizes portfolio diversification, easily adjusts it to their risk appetite, and minimizes costs. Built for the long term, this approach also ensures peace of mind for the investor. Interested? Make a simulation on the Easyvest website and contact one of our managers without delay.