The old rule is broken: not every government bond is a safe investment

Nir Yashar, CEO of Edmond de Rothschild Israel, warns that the assumption that government bonds are a safe investment is no longer a given. The combination of inflation, large deficits, and growing financing needs forces governments to raise debt at higher interest rates, which could lower the value of existing bonds. The yield on the 10-year US Treasury reached 4.74%, and the 30-year yield climbed to its highest level since 2007. Yashar argues that not all government debt is the most solid choice, and that sometimes bonds of strong companies offer a better alternative.

Nir Yashar, CEO of Edmond de Rothschild Israel, warns that the old rule in the capital market, according to which government bonds are a safe investment, is no longer valid. He says the combination of inflation, large deficits, and growing financing needs forces governments to raise more money precisely when interest rates are higher, and the mere fact that a country issues the debt does not guarantee investors peace of mind. This is already visible in the markets: the yield on the 10-year US government bond reached 4.74%, and the 30-year yield climbed to its highest level since 2007. Yields have also risen in Europe. The implication is that when investors demand a higher yield to lend money to a country, existing bonds offering lower interest lose value, so even government bonds can suffer sharp declines. Yashar explains that governments need more money just as money becomes more expensive, due to defense spending, infrastructure, benefits, and interest payments on existing debt. This leads to a conclusion that once would have sounded almost contrary to conventional logic: not every government bond is safer than a corporate bond. He says there are large companies with stable cash flows and strong balance sheets, while countries face deficits and long-term obligations. Therefore, at Edmond de Rothschild, they now sometimes prefer corporate bonds over government bonds. "The change is mainly in the way of thinking," Yashar concludes. "In a world of high public debt and significant interest rates, one can no longer settle for the label 'government bond.' You need to check who the borrower is, for how long you lend to them, and what compensation you receive for the risk."