Financial Education | 27 April, 2018

Solvency against risk of non-payment

Joaquín González Portfolio Manager

Solvency against risk of non-payment: U.S. treasury bonds against high-yield corporate bonds. Financial education with BBVA in Switzerland

U.S. treasury bonds act as safe-haven assets in circumstances such as deflationary crises, economic recession or shocks in financial markets. This is due to the fact that, at times such as these, investors in fixed income often reduce their investments in corporate bonds of low credit quality and, as such, high risk of non-payment. Instead, they prefer the maximum solvency of U.S. treasury bonds.

If an investor had invested their funds in the 30-year U.S. treasury bond before the crisis in 2000 (“dot-com bubble”), 2008 (“U.S. banking crisis”) or 2015 (drop in commodity prices), their investment would have been greatly revalued and they would have received the respective coupons; whereas if they had chosen high-yield corporate bonds, their wealth would have decreased significantly.

However, when there is low financial market volatility and financing conditions improve or standards are less strict, investing in high-yield corporate bonds would result in very high annual returns since the credit risk (non-payment rate) would be very low.

This yield would be, on average, much higher than the yield for long-term investors in U.S. treasury bonds in these periods.

Do not hesitate to contact your portfolio manager for any doubt with financial markets.