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Question on the bond market?

  • 09-12-2010 2:48pm
    #1
    sarumite
    Registered Users, Registered Users 2 Posts: 2,909 ✭✭✭


    If bond holders don't have to share the load in terms of debt repayments, then there is effectively low to no risk.? If so, then why would someone by a German bond that is low compared to an Irish bond which is high? Also, if there is low to no risk, then surely the bond price is artificially high (in a current climate with low to no interest rates)?


Comments

  • #2
    Anonymous1987
    Closed Accounts Posts: 784 ✭✭✭Anonymous1987


    Which bondholders are you referring to? the bondholders of the banks or the bondholders of the government?

    If you are referring to the bondholders of Irish government debt then there is a risk that Ireland will default and be unable to repay its debt to its bondholders. In this case the bondholder will face a loss on their investment. For taking on the risk of this investment the bondholder is compensated with a higher return. German bonds offer a lower return because they are safer and less likely to default. A person may purchase and Irish bond over a German bond to receive a higher return but they also face a higher risk of a loss.


  • #3
    sarumite
    Registered Users, Registered Users 2 Posts: 2,909 ✭✭✭sarumite


    Anonymous1987 wrote: »
    Which bondholders are you referring to? the bondholders of the banks or the bondholders of the government?

    If you are referring to the bondholders of Irish government debt then there is a risk that Ireland will default and be unable to repay its debt to its bondholders. In this case the bondholder will face a loss on their investment. For taking on the risk of this investment the bondholder is compensated with a higher return. German bonds offer a lower return because they are safer and less likely to default. A person may purchase and Irish bond over a German bond to receive a higher return but they also face a higher risk of a loss.

    I was more thinking German bank bonds v's Irish bank bonds. Since bank debts are transferred to sovereign debt and there is less chance of a sovereign default, then buying bank bonds in troubled banks would be a low risk high reward gamble? If the banks survive, you get high percentage pay back and if they fail the government of the respective country takes on the debt burdon and gives you back your money?


  • #4
    Anonymous1987
    Closed Accounts Posts: 784 ✭✭✭Anonymous1987


    I guess the bond market is pricing in 1) the likelihood of more losses on the banks balance sheets which seems high given the amount people in arrears and economic climate 2) the government may not be either able (because of default) or willing to pay the bondholders in the future 3) the Irish banks are highly dependent on ECB liquidity. These factors would seem to suggest a higher return is necessary given the risks above.


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