For investors, there are higher interest rates only against the acceptance of higher risks. Our table with foreign currency bonds and euro bonds from first-class borrowers such as KFW, EIB, Rentenbank and EBRD shows this.
VMany large investors have to be satisfied with little in the bond market. The second wave of bonds that the EU Commission has now launched on the market to finance its € 750 billion reconstruction fund is a good example of this. For the two EU bonds due in 2026 and 2051, investors together placed purchase orders for 130 billion euros. A whole armada of advisory banks, among them Crédit Agricole, Deutsche Bank, JP Morgan, Unicredit and Goldman Sachs, ensured that the EU raised only 15 billion euros. The tight supply depressed the initial yields for investors: They were 0.73 percent for the 30-year bond with a 0.7 percent coupon and minus 0.34 percent for the bond with a zero percent coupon due in five years.
The second EU issue shows: The community of 27 member states has to pay a little more than Germany to borrow. The thirty-year federal bond is currently yielding around 0.3 percent – around 0.4 percentage points lower than the EU bond, with a five-year maturity the EU surcharge is a good 0.2 percentage points. But in no case will investors who hold these bonds until maturity succeed in balancing out inflation, which is currently causing currency depreciation of 2 percent annually.
High returns mean high risk
The way out for investors looking for more returns invariably points to more risk. You can lend your money to debtors with poor credit ratings, or arrange interest and repayment not in euros, but in another currency. Then the level of returns becomes more uncertain and there are higher returns for taking these risks, at least in theory. A number of German banks recently received a higher risk rating from the rating agency S&P, including the cooperative banking sector with its central institution DZ Bank and the Hessian savings bank group with Landesbank Hessen-Thüringen. The cooperative Kirchenbank Liga from Regensburg and the Landesbank Baden-Württemberg, which do not have their creditworthiness assessed by S&P, then only had to offer coupons of 0.65 percent and 0.25 percent for their borrowing in euros.
The new LBBW bonds show that higher interest rates are possible in other currencies: 1 percent in Australian dollars and 1.3 percent in Norwegian kroner. However: interest and, above all, the full repayment of the bond are made in the other currency, the rate of which fluctuates against the euro. If the bond currency revaluates, the moneylender receives even more, if it devalues it, he gets less in euros. The more susceptible to fluctuations and, above all, the weaker a currency appears to be, the higher the interest rate for this currency risk – at least in theory. The new bonds from the government promotional banks from Asia, first class in terms of debtor quality, from KfW, Rentenbank, Osteuropabank (EBRD) and European Investment Bank (EIB) in euros and currencies such as the Hong Kong dollar, Romanian leu and Ukrainian hryvnia show the connection: there are high interest promises it only for accepting high currency risks.