France has officially entered a recession and it has
been downgraded as far as its credit rating is concerned, yet its government
bonds have been given good returns. Meantime there is criticism of the economic
policy of the French President that he is forcing French businesses out of the
country.
Government bonds that were purchased in 2012 have been
writing returns of 12% despite S&P’s rating of France’s credit rating. The
yields of the 10 year bonds have been decreasing to a new low to 1.659%.
New bonds, when issued, are at face or par value and
held until (theoretically) maturity. The factors that play role in bonds are
time to maturity, yield and risk. If an investor holds bonds until maturity,
then the investor receives a return called the yield. Thus a bond with a 5% yield and maturity of 3 years,
will pay the investor at return of 5% per year until maturity.
Since bonds are bought and sold for profit and are rarely
held until maturity, bond price fluctuation is important. One of the factors
that affect the price of bonds is interest rates. And we have an inverse
relationship between bond price and yields: as the yields go up bond prices go
down. In the case of the French bonds, yields are at 12%, so in line with the
relationship, yields are at an all-time low.
Data from Blomberg on 10 - year Government Bond Yields which shows that French Yields are 50 basis points higher that German yields.
Europe Yield
1 Day 1 Month 1 Year
French 1.87% 0 +8 -97
German 1.37% 0 +12 -6
