Interest and inflation are closely related.

This applies not only to the economic context, as Recep Erdogan's Turkey is trying to prove, but also to the investment.

Bond buyers often point out that they are buying them because they do not want to speculate and therefore prefer fixed interest rates and fixed repayments.

In fact, however, they either speculate after all, or they do it implicitly - or ignore important principles for their investment decisions.

Which would ultimately be the worst of all variants.

Martin Hock

Editor in business.

  • Follow I follow

Would you like an example? Slovenia is issuing a bond these days with a nice coupon of 1.175 percent. This is a huge amount for a euro government bond with an average rating of “A +” these days. The catch is the term of 40 years. Anyone who expects this bond to retain at least the value of the money invested until the end of the term is speculating on an average inflation rate of at most 1.175 percent by the year 2062. An enormously courageous assumption, not only now in view of the much higher rate of price increases, but in general . Just think back 40 years. At that time, not only was the inflation rate more than 5 percent, Slovenia was also part of a socialist Yugoslavia. Since 1956, the average inflation rate in Germany over a period of 40 years has been between 1.9 and 3,2 percent.

The bottom line is that holding the bond from subscription to the end of the term results in a real loss of value of 5 to 45 percent. That looks better than negative interest at the moment. But with more inflation there is hope for more interest. So it might be advisable to invest more short-term now with lower interest rates if you want to buy a bond whose yields are currently hesitant to follow the inflation trend. Rhineland-Palatinate offers a two-year bond - with interest that is the equivalent of chopping onions: 0.01 percent. Also makes a significant loss in value with 2 to 3 percent predicted inflation. But maybe there will be something better again in 2024. At the moment, you could bet on foreign currencies because the euro is currently not trusted very much.For the Australian dollar, for example, the twelve-month forecast is favorable, which could make LBBW's five-year bond interesting.

Uncertainties about economic development

As for the development of interest rates and bond yields, this is fraught with some uncertainty.

Which is nothing new in itself, but it is currently more true than ever.

The US Federal Reserve, for example, has indicated that interest rate hikes could start earlier and the balance sheet could be reduced more aggressively.

But while some say that communication is clear, low-interest optimists in particular see enough reason that in the end not everything is eaten as hot as it is cooked.

Central bank chief Powell recently spoke out neither in favor of four rate hikes this year nor a start in March, nor did he give details of when the reduction in total assets should begin.

And then there are still uncertainties about economic development, in the form of reduced air traffic, a labor shortage and the consumption-dampening rise in energy prices.

"Even if the bond markets are very sensitive to the messages from the central banks and have priced in more interest rate hikes than they did a few weeks ago, there must be a scenario in which the normalization of monetary policy is delayed," writes Chris Iggo, investment strategist at the fund company Axa IM .

For now, the market is leaning towards the view that bond yields “will struggle” until a new consensus is found on interest rates.

As long as the following applies: The relationship goes more separate ways than usual. Fits a little in time.