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Govt. bonds require greater scrutiny

Global financial markets shuddered yesterday as Europe’s strongest economy failed to get bids for 35 percent of a debt issue – a sign to many observers that Germany, too, could get entangled in the continent’s growing debt crisis.

Traditionally considered among the safest investment opportunities around, government bonds are losing some of their luster, evidenced by the increasing yields they must offer to attract investors.

CFAL’s Senior Vice President, Kevin Burrows, told Guardian Business that while Bahamian government bonds still have a place in many local investors’ portfolios, all government issues are more suspect now than in years past.

“It’s probably a safer bet than domestic equities, but you have to recognize that government securities are no longer the risk-free security they were thought to be prior to the financial crisis of 2008 … and that goes for all governments’ securities,” Burrows said in an interview yesterday. Though an ocean away, Germany’s failure to sell its full bond issue has serious implications for The Bahamas.

It may be the first sign the growing yields countries like Greece, Italy, Portugal and Spain have had to offer investors for their bond issues may have spread to the strongest economy in the Eurozone.

A significant consumer of U.S. goods, if Europe’s debt crisis triggers another recession there, it could depress U.S. productivity and spark recession, many experts fear.  Bahamians know too well how a downturn in the U.S. Economy manifests locally.

For Bahamians, Burrows said even with the recent downgrade of The Bahamas’ credit rating by Standard & Poor’s, government bonds were still investment grade securities.

They present a reasonable yield for those confident the government will make sound decisions on debt levels, he said.

If you’re shopping for bonds, Burrows said high quality issues yielding around 4 percent in this environment could make good investments.

It’s important to look for issuers that offer a good cash yield, he said, backed by strong financial valuations.   Many investors will need to lengthen their time horizon too, Burrows saying if they have three of four years to wait, good investments should pan-out.

“For a domestic investor putting money into their own government security is a relatively safe thing to do if you are a citizen and have no intention to leave, and are fairly comfortable your government won’t borrow to excess,” he said.

“So Government stock in The Bahamas now has a fairly decent yield – high by global standards at about 4 ¾ percent.  That’s not a bad yield,” Burrows said.

Averaging 1.98 percent, Germany enjoyed a lower yield for its failed 10-year bond issue than the U.S. currently does — averaging around 2 percent for a comparable 10-year issue, Burrows said.

Germany had aimed to raise 6 billion euros, (about USD 8.008 billion yesterday) with the issue, although commercial banks only took up 3.644 billion euros (USD 4.863 billion).

The Irish Times reported yesterday that the head of Germany’s Finance Agency Carl Heinz Daube blamed “nervous markets” rather than failing investor demand for the poor take-up of the issue.


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