💡 A reader sent me this question:
“I’m looking at a high quality, AAA-rated German government bond. That’s supposed to be a super safe investment, right?
But in 2022 the price dropped by 18%. How is that even possible?”
Let’s put on our detective hats and figure it out 🕵️♂️
There are 2 reasons why a bond price can fall.
👉 The first is a problem with the credit quality.
If you own a German government bond, the German government owes you money.
If investors think the government won’t be able to pay them back…
…if they suspect that Chancellor Scholz spent the federal budget on schnapps and sauerkraut…
the bond price could fall.
Did that happen in 2022?
No.
I have no data on schnapps consumption…
…but plenty of cash was left over.
Germany’s AAA credit rating didn’t slip.
👉 So what’s the other reason bond prices can fall?
Well, it’s got to do with interest rates.
At any given point in time…
for any given bond rating and term…
there is a certain % of interest investors expect to be paid.
In January 2022, German government bonds paid around 0%.
But then interest rates started rising.
The European Central Bank pushed rates up to fight inflation.
Investors now expected AAA-rated bonds to pay more than 0% per year.
And the old bonds – paying 0% pe year – were no longer attractive.
Their price fell 📉
It’s kind of like when you buy the newest iPhone.
At first the resale value is great.
But if a new iPhone comes out…
…yours is no longer sexy…
and the price falls. 👎
This is why it’s important to get educated before you start investing.
⚡️ I launched the Index Masterclass back in 2021…
…and in our training course I covered this risk.
I said that if you buy bonds that pay 0%…
you’re getting nothing – but taking lots of risk.
And as you can see, that risk was very real.
👆 Now today the situation is very different.
There is still risk in the bond market…
but there are also opportunities…
if you know where to look.
So it’s time to get educated! 🚀
