Investment series: Bonds - are they better than fixed-term deposits?

If you are suspicious of the ups and downs on the stock markets, but the low interest rates on fixed-term deposits don't knock your socks off either, you may have already thought about bonds.

It used to be easy. Since the late sixties, investors have been able to buy a "treasure": the Bundesschatzbrief. This was a popular way to park money and get it back, along with interest, because it was very safe. But the Federal Republic of Germany stopped issuing its treasury bills in 2013.

1. federal treasury bonds no longer exist, what now? 

Today it is much harder to get a good fixed-income security. The market for such bonds is very complex. And if you don't look closely, you get the worst of both worlds: low yields and fluctuating prices.

A bond is a securitized way of lending money to someone. To the State or also a Company. At a fixed date, for example in ten years, this debtor promises to pay back your money. It is also agreed that you will receive regular interest payments until then.

Now, there are two features in particular that distinguish a bond from - say - a savings book or time deposit.

2. the risk of loss

Point one: If things go badly, the money is gone by the repayment date. Or at least part of it. To prevent countries from going bankrupt altogether, Greece and Argentina, for example, have agreed so-called debt cuts with their creditors in the past. In 2012, the value of Greek government bonds was halved in one fell swoop. By contrast, the Federal Republic of Germany has always paid on time.

There are also big differences in the companies that issue bonds: The spectrum ranges from solid black bread companies to crisis-ridden industrial dinosaurs.

3. bonds are also traded on the stock exchange

The second special feature is that many bonds are traded on the stock exchange and can therefore sometimes be worth more, sometimes less. They therefore have a fluctuating price, just like shares. Rating agencies are supposed to help assess the creditworthiness of bond borrowers with their ratings. Nevertheless, the matter remains complex.

Therefore, our advice: If you already take a risk in order to be able to achieve more return, then rather reach for Shares bundled in index funds (ETFs). The low-risk part of your Investment are better covered by fixed-term deposits and overnight money.

4. why fixed-term deposits are usually better

Just like a bond, your Fixed Deposit Account a specific interest rate. You get out at least the money you paid in. This is not necessarily the case with a bond. German government bonds are so sought-after on the stock market that you get a negative return if you buy them on the stock market now. In the case of ten-year bonds, this is currently around -0.6 percent per year. Another plus point is that, unlike a bond, someone guarantees you repayment. The statutory Deposit insurance covers 100,000 euros per saver and bank in the EU.

5. who buys bonds with minus yields?

Nevertheless, German or Austrian bonds, for example, are bestsellers, as the first Corona bond of the EU, a 100-year bond from Austria or the newly introduced German bond with a sustainable touch. This can be explained by taking a closer look at their investors. There are hardly any private individuals among them. With the end of the Bundesschatzbriefe, the German Finance Agency is no longer directly targeting small savers at all. They can buy them through their securities account once the term has begun. Banks, insurance companies and other big players grudgingly accept the negative returns because they see no better option for storing their money safely.

6. it's the mix that counts: Bond ETFs

If you would still like to put bonds in your portfolio, you should in our guidebook look. Maybe are Bond ETFs an idea for you. These funds are not only available with shares, but also with bonds. Automatic Robo-Advisor like to use them for the low-risk portion of the investment. However, do not expect any miracles in terms of returns, especially in the foreseeable future, and watch out for good ratings. Default risks for weaker companies and sovereigns are likely to increase rather than decrease.