"Time is a relative term!" And what about the terms "yield" or "return"


"Time is a relative concept!" Said Jan Werich and Miroslav Horníček on the stage in the 1950s. And "relativity" is a particularly relevant term for investments and capital markets.

Source: Bloomberg

Since 2019, the Ministry of Finance has been issuing "Bonds of the Republic" with the subtext of patriotism. The last tranche will be issued on January 3, 2022, the subscription period ends on December 23, 2021. Two types are issued: reinvestment and anti-inflation.

In a somewhat funny video from December 8, 2020, Minister Alena Schillerová promoted the anti-inflationary bonds as conservative, while for the other, reinvestment bonds, she emphasized their higher (and even increasing) returns. For the sake of completeness, let's just mention that both types are reinvestment bonds by definition.

It was apparent from the very beginning (see the article The Czech Republic's "Republika" Bonds: "Don't hesitate and get it done in time." Says Mrs Minister.) that the reinvestment bonds were even more conservative than the anti-inflationary ones - their lower real return (given the expected inflation) was clear.

However, the time and the unexpected CPI development have made the anti-inflationary bond holders extremely satisfied. At today's inflation rate, the nominal yield exceeds 6% and the real return remains at the declared level of 0.5 %.

Minimum interest in the so-called reinvestment bonds can be expected during the final thirteenth round of their issue: they currently offer a real return (or loss) deep in negative percentages.

Anti-inflation bonds now become a "highly profitable" investment. On the other hand, the state debt service on them will become more expensive - fortunately, their total amount represents a minimal share in the state debt so far.

And the nominal yield of over 6 % on anti-inflation bonds? Under normal circumstances, such bonds would look like "high-yield" or even "junk bonds" and their returns would indicate a higher degree of risk - the issuer's default. However, capital markets have not behaved normally for at least 10 years. So, let's see.

Michal Mareš
Member of Investment Committee
AKRO investiční společnost, a.s.
Prague, 1st December, 2021




This article does not constitute investment advice or a recommendation to buy or sell any security.