Beware of dual currency bonds

Those who invest their money should look carefully – the options often differ in the details.
Bild: Picture-Alliance

Those who want high interest rates today only have the choice of which risk they take: poor creditworthiness, long term – or structuring. Dual currency bonds are particularly tricky.

DIt is well known that better quality bonds are currently hardly generating (interest) income. Even if interest rates should rise in the foreseeable future, it is not unlikely that real returns (i.e. after deducting inflation) will continue to be in the range of zero or less. Currently, however, the bond purchases by the central banks are giving the market certainty that bonds will still find buyers. They no longer exist if interest rates should rise because bond purchases have already been stopped beforehand. That could be uncomfortable because, in view of the higher interest rates, nobody wants to have bonds with coupons of 0 to 0.75 percent anymore – still a dream of the future, but definitely a latent risk.

The fatal thing is that these bonds have no interest rate cushion, which is precisely why bonds are considered safer than stocks, for example. In short, the risk of bonds has approximated that of stocks. If you want high bond rates today, you have to take more risk. These can be credit risks by switching to high-yield bonds or so-called duration risks due to longer terms. Or structuring risks. Reverse convertible bonds, for which the amount of the repayment depends on the price of a share, are currently numerous, and they are well known.

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