Saturday, July 10, 2010

Returns and Risks Government Bond Markets (in USD); situation per June 30, 2010

A couple of days ago we presented the return and risk overview for selected Equity Markets. Data were from MSCI and LMG Emerge.

Today we present data from the government bond market. As you will notice the number of markets is lower, with the main difference being that there are far less Emerging Markets included. This is explained by the fact that we limited our sample to countries that were a) part of the LMG Emerge GTAA bond model; and b) issuing foreign-currency denominated government bonds in the international capital markets.

The latter constraint is quite important. We want this ranking to show bonds that were supposed to be relatively low risk compared to equities. Local currency denominated bonds can be a good investment, but whenever a country is tempted to loosen its monetary discipline to the extent of printing money in too large an amount the quality of the currency will be an issue. In international capital markets countries that struggle with repayment of debt cannot follow this kind of easy way out. That is why we limited our sample to the selected countries.

The critical observer might ask: 'But what about China? Why aren't Chinese bonds included yet?' Isn't there currency strong enough? Or can't they easily borrow in international capital markets? The answer to both questions is YES. However, we do want our data to be objective. It is not only about a country being capable of borrowing in the international capital market, they have to do it as well.

The return columns are derived in similar fashion as what we described when ranking Equity Markets. The difference is that we defined a 5 percent return as 'normal' versus a 7 percent for equities. The difference in 'benchmark' level is explained by risk differences between bonds and equities.

The table is ranked based on the 3-year annualzed return. The top of the table is basically filled with 'quality' countries like the UK, New Zealand, US, Netherlands, France, Germany etc. Only Hungary posts reddish (i.e. risky) colors in the risk columns.

The first place of Italy is quite remarkable, because some observers feel that the current troubles with Euro in the PIGS countries (Portugal, Ireland, Greece and Spain) should actually be extended to Italy as well. We do not see that yet in the performance of the Italian market, whereas the PIGS nations are neatly packed in the bottom ranks of the table.

Greece was a disastrous bond story.

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