Bond investments require detailed analysis of the general economic scenario, to ensure peace of mind when making decisions. This is especially true given the recent deluge of novelties on markets. However, it is still an excellent method for investment diversification which enables us to look beyond the equity market. Furthermore, adding government bonds to our portfolio is also a way of reducing risk and protecting ourselves from any financial crises.

Investing in bonds: factors to assess today

As previously mentioned, certain recent events have changed the bond market and require us to carry out a careful assessment before investing. One such event was the ECB decision to suspend Quantitative Easing as of 30th September. QE is the plan whereby the ECB acquired government bonds to reduce the cost of debt and stimulate the economy.

Therefore, Quantitative Easing, which had already seen a monthly reduction of 30 billion, was stopped altogether. This means that European countries are now required to go it alone in the face of market challenges. With this manoeuvre the ECB acquired 2 trillion euros in state and European corporate bonds. Italy benefited extensively from QE, therefore the suspension of this plan may have repercussions on our market.

The official interest rate issue

In USA, the cycle of increases is probably nearing closure, bringing the Fed Fund Rate to 2.25%/2.5%. In contrast, there are no signs of change in Europe.  In fact a securities plan has been announced.

USA fears interest rate rises because there is a belief that they may be a burden on the federal budget and the entire economic circuit, including families, thus undermining economic growth. After the rise in interest rates in 2017-2018 and the sale plan of Fed securities, markets responded negatively. This led the Fed to reduce the sale of securities starting from May and to stop altogether in September.

In Europe and especially in Italy, in addition to a fear of interest rate hikes there is also the issue of high public debt. Unfortunately savers must also take into account the rise in interest rates, which may affect those who have invested in fixed rate bonds. In contrast, higher interest rates imply higher debt costs, a factor which may lead to an increase in insolvency cases at a system level. This may result in greater expense (also public), a factor which must be assessed at a system level.

The rate increase is not necessarily linked to a rise of ECB rates, rather it may be related to a simple market dynamic. In general, even if Italy is considerably strained by the current spread situation, no bond market collapses are in store. However the situation is complex and less expert souls are advised not to go it alone in the bond world. Rather, they should seek assistance from common fund professionals with experience in the management of portfolios containing bond investments, such as those at Tendercapital Bond Two Steps. (Click on the link for more descriptive and promotion information on Tendercapital Bond Two Steps.)