Interest-free risk instead of risk-free interest

In the age of zero interest rates, risk-free interest rates are history, complain asset managers. There is still interest, but only for a decent risk.

There is also risk in Austria - just no interest.

“Instead of risk-free interest, there is only interest-free risk” is a sigh that has been heard from many asset managers for years. What is meant is that the times are over when you could simply secure a stock portfolio with a few federal bonds and earn halfway enough income with an interest coupon. If you look at the current bond offer, you are initially inclined to agree to the lawsuit.

As part of an increase, Austria offers a coupon of – 0 percent for a five-year bond, while Apobank pays 0.37 percent for nine years. You don’t have to calculate too much to be able to assume that after deducting inflation with these bonds, the money will be worth less at maturity. This prospect is low risk.

The interest-free risk

With a view to the end of the term, however, the risk of the bonds themselves has not changed. The probability that Austria or Apobank will not be able to meet their obligations in a few years’ time had to be assessed in the same way as it is today. And anyone who points to higher banking risks can be countered by the fact that new capital regulations and precisely the low interest rates have on the other hand improved their situation. Seen in this way, the risk is not significantly different, only there is (largely) interest-free.

It looks a little more difficult for asset managers. Because despite negligible interest rates, bond prices are still high and yields are at their lowest, often negative level. Not only is the risk of a setback latently higher, but money can only be earned with bonds through price gains – similar to shares with only no (significant) payouts – interest-free risk.

Interest rates with risk

If you want higher interest rates, you have to take even more risk. It’s not that there aren’t any offers. Double-currency bonds, for example from the British Barclays Bank, are issued in Brazilian reals and 5 percent interest is repaid in Japanese yen. Foxtrot Escrow, which is offering 12.25 percent for its seven-year dollar bond, is currently paying even more interest. In addition to the exchange rate, there is also a decent issuer risk. A rating can hardly be much weaker than “B-“. And it takes some effort to find out that the American plastics manufacturer FXI is behind Foxtrot.

Alternatively, you can still use SME bonds. Yes, they still exist, even if the name has lost its tone among issuers a few years ago since the wave of insolvencies. The securities, also known as “mini bonds” due to their low volumes, now also have a significantly larger interest spectrum. 13 percent comes from the Estonian Iutecredit, which grants installment loans in the Balkans from Bosnia to Moldova. The business risks are obvious in the face of soft currencies, low living standards and political instability.

For those who like it a little less risky, the Underberg bond might be a good choice. This is the seventh loan for the producer of bitters. With the new paper with a volume of 60 million euros and a coupon of 4 to 4.25 percent, the aim is to replace two older, higher-interest-bearing securities. The lack of interest suits Underberg: The Rheinberger paid 7.125 percent for the debut bond in 2011.