Tag Archives: bonds

German Debt

Yesterday, Spain issued debt at the highest yield in the last 14 years. One of the words most listened in the news lately is “spread”.

I recalled some words from my brother, months ago, pointing that absolute value of yields hadn’t changed that much as even though the spread was increasing German bonds’ yields were declining.

I wondered, how much are they declining?

Germany’s GDP is around 3,600 bn€. Its state debt is reportedly about 83.2% of its GDP, around 3,000bn€.

I checked German bond numbers in the German Finance Agency [PDF]. In the latest factsheet from end September, you may see the different auctions of different bonds and bills planned for the year and the volume of each one. You may get as well a glimpse of the debt structure. The factsheet shows how much of its 1,101bn€ in outstanding government securities are auctioned during 2011 in 1-year bills and how much in 10-year bonds (of the 1,101bn€, 275bn€ will be issued during 2011). Using that structure and the respective maturities, the composition for the whole outstanding securities can be estimated.

Note: When bonds are auctioned the coupon (interest) to be paid on them is fixed by the state, e.g., the 10-year notes have a coupon or interest paid on its face value of 2.25%. It is the yield what is variable because buyers will pay more or less for the bonds’ face value.

What are then German bond yields and latest prices paid for them? This information can be found at Bloomberg or at the Bundesbank (for a higher detail and historical yields). You may see there that 10-year bonds currently (as of yesterday) had yield of 1.78% and latest price was 104.19 euro cents, paid for a euro of face value (remember that the coupon is 2.25%, as it is stated in the German Finance Agency factsheet).

With all the previous inputs the next question is clear: How is the debt crisis affecting Germany? The fact that investors are running away from the debt of other countries (at the same time that they demand lower prices and thus increase yield of Spanish bonds) they see German bonds as a refuge: they are willing to pay more than 100 cents for a face value of one euro, making debt cheaper for Germany.

In the graphic below we can see the evolution of the 10-year bond during the last two years. It has had around 3% of average yield during that time (versus current yield of 1.78%). We can get an idea of how much Germany is saving during these troubled times.

German 10-year bonds evolution.

Let’s calculate those savings. You may see in the table below, that given the estimated structure of the German debt (based on this years’ proportion of auctions by the Finance Agency), the coupons paid for each kind of bond on their face value, the prices and yields, from end June and November, Germany has achieved what would be yearly savings of about 12 bn€.

German debt: securities structure, coupons, yields, savings from end June to November (data as of Nov. 15, 2011).

These yearly 12bn€ would be saved just by the government securities (1,101bn€ outstanding), not public debt from other German institutions (~3,000bn€ in total), and only if yields continued to stay at current levels during the next issuances of debt.

As a final note: the German contribution to the European Financial Stability Facility [PDF] (EFSF) is 211bn€. Wild guess:  How much of that contribution could be paid with the German debt savings if its yields stayed this low?

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Inflation and assets

During the last weekend, I spent some hours watching the webcast of the annual investors’ conference of Bestinver, a Spanish investment fund.

I find the conference itself not only entertaining and informative but quite funny due to the way the fund managers show their value investing principles and how stubborn they’re with them (luckily for investors). The experience is comparable to that of Berkshire Hathaway annual general meeting.

As in previous years the managers defended how not only to have profits but to defend your savings during recessions it is much better to be invested in real assets than to have your money in cash, state bonds, etc.

This time they raised the case of Mexico during 1979-1988 (in previous cases they had referred to the Weimar Republic or Argentina), based on an analysis by Marc Faber (a presentation containing the same info can be retrieved here, PDF 4.8MB). During those years the Mexican peso suffered an extreme hyperinflation explained in the Wikipedia as follows:

In spite of the Oil Crisis of the late 1970s (Mexico is a producer and exporter), and due to excessive social spending, Mexico defaulted on its external debt in 1982. As a result, the country suffered a severe case of capital flight and several years of hyperinflation and peso devaluation. On 1 January 1993, Mexico created a new currency, the nuevo peso (“new peso”, or MXN), which chopped 3 zeros off the old peso, an inflation rate of 10,000% over the several years of the crisis. (One new peso was equal to 1000 of the obsolete MXP pesos).

Mexican peso evolution vs USD. Source: Ron Griess

Obviously, anyyone who either held savings in cash in pesos or Mexican bonds at that time virtually lost all his money.

However, the same author made the analysis of what would have happened during those years to an individual holding Mexican stock, for which he used the Mexican Stock Exchange Index. The result is that at the end of the decade that person would have kept his wealth in US dollar terms, as the nominal value of the Mexican stocks raised at par with the hyperinflation and peso devaluation going on in the country.

Evolution of Mexican Stock. Source: Marc Faber

Conclusion: better be invested in assets if only to keep your savings safe in the long run.

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Stocks vs. Bonds, 200 years

Some weeks ago I had two different conversations with friends. The issue: whether Greek bonds would be a good investment given the yields they are being offered at. I then argued that I didn’t think it was a safe investment, that many countries had defaulted payments, and as a value investor in the making I tried to explain that a much better investment would be to find out there some great stocks at a big discount.

I was also looking for some graphics to send them to prove the point. I had seen those graphics at the annual investors’ forum of the asset management firm Bestinver in different years. They represented how different the outcome of an investment would be for a person living either in Germany in the 1920-30’s or in Argentina in the last 15 years in case this person had invested in the stock market or in government bonds, supposedly safer.

In both cases the investment is much better off when it’s composed of stocks, as they represent a portion of a real company that continues to operate after the crisis and the currency devaluation/hyperinflation period that typically follows. The value of the investment in bonds is suddenly reduced to nearly zero… At that time I didn’t find any of those graphics in the Net, but the other day I found a similar one. Here it goes (note the scale is logarithmic):

Stocks vs. Bonds, 200 years comparison.

Please, note the difference especially between German and Japanese bonds and stocks. But also with US and UK stocks and bonds the difference persists.

The managers of Bestinver year after year repeat the same example: in those situations is much better to be invested in real assets, be it portions of an enterprise (stocks), chairs, and pencils, even houses… all these are assets that once the crisis is over will retain the value they have. However the paper money has no value once the nominal value is devalued.


Filed under Economy, Investing