Bonds are traditionally seen as an investment for the more cautious, but the Euro-zone debt crisis has shown that this is not always the case.
According to a Citywire report some funds have lost between 2% and 6% of investors money after taking on what they saw at the time as good value bank bonds.
These aren’t staggering losses but there are other concerns, like what happens if a Euro-zone crisis solution is not found? And also the question of why these funds had 30% to 52% in bank bonds on the books when the crisis started?
It sees that after the last credit crunch funds bought up bank bonds cheaply then watched as they rose in value. But they were then caught out with the speed of the recent crisis hitting those same bond values again.
For anyone with their investments or pension savings tied in with these funds will not be too happy. Especially if they thought that their money was being shielded from the volatility and recent losses seen in the equity markets. Normally you would actually expect bonds to gain value during these times.
But there is also a wider concern.
Although a bondholder should get their money back ahead of a shareholder if a company goes belly up, there is always the danger of a bondholder haircut in any debt restructuring to save the company (or maybe even a country).
In the past countries and large corporations debt was seen as on the safest side of the equation, but the EZ debt problem and the global interconnection of just about every financial transaction has brought this firmly into doubt. A debt failure of one largish entity would almost certainly trigger the dominoes.
Is anyone safe investing in anything these days? To some people stashing it under the mattress will sound like good advice. At least they’d have something left they could rely on. But that too holds the risks of theft and inflation.