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Analysis
Educational exposure of ideas, assumptions or hypotheses, based on proven facts" (which need not be strictly current affairs) Value in judgments are excluded, and the text comes close to an opinion article, without judging or making forecasts , just formulating hypotheses, giving motivated explanations and bringing together a variety of data

A 20-year investment that pays 4.8% interest backed by the US government

Sovereign debt may appeal to balanced investors who have confidence in ‘the system’

A bronze seal for the Department of the Treasury is shown at the U.S. Treasury building in Washington.
A bronze seal for the Department of the Treasury is shown at the U.S. Treasury building in Washington.KEVIN LAMARQUE (REUTERS)

It’s a simple yet complex proposition. Fixed-income assets are becoming more appealing for long-term investing. They offer independence from stock market cycles, which have been delivering above-average returns for a decade — a trend that may or may not continue in the future.

If we were to survey millions of investors in government securities and ask what returns they want, most would respond, “I’m satisfied with 4%-5% while not putting everything in the stock market.” Back in the day, governments were able to offer these guaranteed returns because of investor trust in their financial stability.

The average annual stock market performance is around 10%. Personally, I would be content with half of that for the peace of mind of not having to worry about my investments. Investors now have the opportunity in the United States to invest in government-backed securities at 4.8% for 20 years, which would go a long way toward building a secure retirement nest egg. While this may seem like a no-brainer, it’s really not because it involves trusting that interest rates won’t go up much more.

I don’t know about that — here’s why. A long-term interest rate generally reflects the nominal GDP growth. So, considering potential GDP growth of 2% and a target inflation rate of 2%, a 4.8% interest rate on an investment seems reasonable. But investors always need to carefully assess the solvency of the bond issuer, which in this case is the U.S. government. Many believe that lending money to the government for 20 years is a worthwhile risk, considering that they are typically the last to go bankrupt. Ultimately, the government holds everything together, even though investing in top companies may seem safer. The only downside is that you must trust a system characterized by perpetually indebted states that print money to sustain the welfare state and fund economic globalization. If you are not comfortable with locking up your money for 20 years, you might go for a 10-year U.S. bond at 4.5%, just 30 basis points less than the 20-year investment.

If I were an American over the age of 50, with a 50% stock and 50% fixed income investment profile, I wouldn’t hesitate to invest in a 10- or 20-year bond for my retirement. The respective yields of 4.5% and 4.8% are quite appealing. However, as a European, I also need to consider currency fluctuations that could impact the fixed income guarantee. Sovereign debt investments in the eurozone tend to offer lower yields. Germany offers 2.8%, while Italy’s yield is higher at 4.7% over 10 years. These investments are a litmus test for Euro-skeptics, as they require strong faith in “the system,” and that those in charge of “the system” can keep everything on track.

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