Which is the safest country to invest? USA

Which is the safest instrument to invest in? Bonds

So the safest investment in the safest country has to be the US Gilts, right?

Re-think. Re Rethink again. Welcome to the world of REAL RETURNS and inverse relationship between interest rates and bond prices.

The USA has held the interest rates low for a very very long term. This of course has led to currency wars (all countries are holding their currency against the US $), and inflation is slowly inching up in US and UK. So if you are an investor/saver who is trying to get REAL returns, you need to get a higher return than the 1 % that they were paying till a few months ago. What has happened is the interest rates have slowly inched their way UP from 1.5% p.a. to 2% p.a. This is HUGE. HUGE, HUGE. Do not look at it as ‘half a percent’ it is a 33% jump in interest rates.

If you buy a US GILT bond at issue price of say US $ 1000 and hold it to maturity, technically you do not have a loss – except for inflation. However if you have invested in a bond fund just imagine what happens if interest rates in the developed word moves to say 6% p.a. or even worse if it moves to 10%p.a. Do not ridicule this – 10 years ago if somebody had told you that interest rates will be NEGATIVE (real rates) for 10 years at a stretch, you would have laughed. Just a Fed play has kept interest rates at such low rates.

So an interest move up will completely damage your bond fund – and give you such a hit, you will be blinded. Make no mistake this kinda damage to your portfolio is something you cannot even imagine, especially if you are a bond and bond fund player.

What implication does this have for investors in India? Nothing. Except the collateral damage that happens. Surely, we are in for interesting times.

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  1. Sanjay Singhaniya

    Subra Sir, you said :
    What has happened is the interest rates have slowly inched their way UP from 1.5% p.a. to 2% p.a. This is HUGE. HUGE, HUGE. Do not look at it as ‘half a percent’ it is a 33% jump in interest rates.

    Point taken. But still bond fund of 100$ with 10 years maturity will become worth of 95$ or so. Its worth is not going to be 66$ or of similar value.

    Let me know if I have missed something obvious.

  2. and that gentleman is 4 years gross interest or 3 years net interest? gosh! also if it was a 30 year bond what happens? u might as well keep your money in a 0.5% dividend yield scrip….

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