Despite record low interest rates, money continues to pour into bonds around the world. This trend is true among investors in the U.S., Japan, and the eurozone. But let’s take a look at the situation. Both the U.S. and the Japanese government are up to their necks in debt. And Euroland is groaning under unique problems. So, should you be investing in bonds? Let’s talk about the state of the income markets.
Bonds have advantages when it comes to investing money. Unlike stocks or gold, price fluctuations are generally low. This trait helps to stabilize your portfolio’s performance. However, you should ask yourself whether you would be better off investing in bonds from the countries mentioned above instead of bonds from another country.
Special Problems in the Eurozone
First, let’s take a closer look at the eurozone’s challenges. The euro – as a currency – once brought together countries with different interest rates and monetary and economic traditions. It created problems immediately. We saw bubbles in the southern countries, as the now low-interest rates allowed cheap loans.
In the European economic crisis of 2011, the bubbles burst, and there should have been a devaluation of the respective currencies. However, this did not happen, as there was only the euro left. Many wages and taxes were too high, which led to the intensification of the economic crisis, especially in Greece.
Remember, every euro nation has a different tax policy. But they all effectively unite under the same monetary policy from the European Central Banks.
Although little has been heard of the euro crisis in recent years, we cannot be lulled into a sense of security. The euro remains extremely fragile, and the problems have been masked with lots of money from the European Central Bank. However, the central bank hasn’t solved any crisis.
The different views on monetary stability, the different levels of inflation, the different levels of the solidity of the banking systems, the different levels of deficits, and the very different government debt levels are a ticking time bomb.
The U.S. Has Incredible Government Debt Burdens
In the U.S., the problems are different. The main issue is the gigantic budget deficit. In 2020, the U.S. posted a record deficit for peacetime of 18.7% of GDP. In 2021, the deficit is likely to be only marginally lower. Moreover, massive budget deficits have already been seen in the years before COVID-19.
In principle, the purchase of bonds is only advisable if the countries have a high level of financial stability. This is because one of the classic indicators for assessing the stability of a country and its currency is government debt.
In Germany, debt rose due to the 2008 financial crisis and the subsequent deep recession but was reduced again in the years that followed. These efforts did not apply to the eurozone. The line barely fell, and at no point did it even come close to the 60% mark, which is known to be the upper limit for government debt in the E.U.
In the U.S., the situation is even worse. There has been no significant reduction in government debt at all since 2000.
Looking for Alternatives
The situation is completely different in the two non-euro countries: Norway and Switzerland. Both countries have a convincingly low level of debt, which only increased slightly even during the COVID-19 crisis.
This significantly reduces the risk of very strong inflation. Moreover, both Norway and Switzerland are not part of the euro area and thus are not directly affected by its problems.
However, investments in the Swiss franc are also only recommended to a limited extent because the currency from our neighboring country is wholly overvalued. We’ll talk more about Norway, an energy rich nation that appears to be far more attractive for investors right now.