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Bond Yields, Interest Rates and Property

Greece has raised €1.5bn in a bond auction of three-year bonds, its second debt issue in three months after a long absence from the international markets. The Greek finance ministry said on the 10th of July that it has accepted half of the €3bn being offered by investors and will pay them an annual yield of 3.5%.Greece was frozen out of bond markets in 2010 and was saved from bankruptcy by an international bailout.

According to the Financial Times, in September 2011, the yield being offered on a three-year Greek government bond peaked at 172% with a 47% spread (the difference between what a bank will buy and sell the bond for). At that time, bond traders were just quoting the bonds in prices, rather than yields, because 'yields have become so high, they are no longer considered meaningful'.

By any standards, that is quite a recovery in less than three years, and brave investors that dared to 'step into the fire' have been rewarded handsomely. More recently it has become apparent that buying Government bonds is far safer than previously thought and companies are now specialising in buying 'junk bonds' at 30 pence or less on the pound, then waiting for that country's economy to recover before suing them for what they are owed (at 100 pence on the pound), despite the fact that the country had previously defaulted.

This is happening at the moment between US hedge funds and Argentina and according to a US court's recent ruling, if Argentina does not pay the group of hedge fund managers over $1.3bn worth of bonds by July 30th this year, the country could go into default (again).

In short, if you can afford to buy bonds without relying on the yield then it can pay to buy when everyone else is selling. The main exception being if the country is about to be written into the history books…Soviet Union bonds anyone?

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