Why bonds are considered a safer investment than commodities or shares
The following risks may be distinguished regarding bonds:
- Price risk: effects of a change in market interest rates on the bond price;
- Credit risk of the bond issuer;
- Currency risk (only for foreign currency bonds);
- Liquidity risk;
- Call risk.
The first risk with bonds: Price risk
The second risk: Credit risk of the bond issuer
This chart shows that euro investment grade bond spreads are trading well above their lows.
The 3rd risk of bonds: Currency risk
In the case of bonds denominated in a foreign currency (e.g., US dollar or pound sterling), risks or opportunities may arise due to the exchange rate fluctuations of the foreign currency against the euro. If you hold a US dollar bond with interest paid in US dollars, then the interest credited in euros will increase in value if the dollar goes up against the euro. An additional profit can also be made when the bond is redeemed if the dollar exchange rate is higher at redemption than when the bond was purchased (since you get more euros for the same amount of dollars). Otherwise, however, there can also be currency losses in the same way. Therefore, this uncertainty is considered a risk. Read more about US BONDS here (Link).
The exchange rates Dollar versus EURO over the past 10 years
The final risk of the bonds: The call risk
Risk and return
“Again the old principle applies: the higher the return, the higher the risk”
If you would like to discuss the risk of investing in bonds in detail, you can arrange a personal meeting with one of our investment experts.
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