Bond interest rates are once again reaching new record lows. From an investor’s perspective, this asset class is thus becoming more and more of an imposition. On the extent of negative interest rates, the role of the velocity of money and the question of whether the staking of cryptocurrencies can offer a refuge for „bond fans“.
In the past, those who rely on predictable and regular income from capital assets have predominantly relied on fixed-income debt securities or bonds. Especially when it came to retirement provision, pension funds and life insurers generated most of their income via bonds, ergo government and corporate bonds. Only then came dividend income from shares or income from real estate leasing or through REITs.
This is now finally over. As a result of zero interest rates and the expansion of bond-buying programs, all European government bonds have moved into negative territory for the most part. Recently, not only German or Austrian government bonds have been trading in negative territory, but even those of countries that would be on the verge of insolvency without ECB assistance.
It doesn’t matter whether it’s Germany or Italy: The main thing is the eurozone.
Looking at the current interest rates for government bonds, it is striking: All short- to medium-term government bonds from the eurozone are trading in negative territory. It is also noticeable that the creditworthiness of the countries from the euro zone is hardly of any importance. For example, a 1-year Italian government bond (-0.47 percent) is rated almost as safe as a German government bond (-0.75 percent). The fact that the difference is so small has less to do with fundamentals than with the fact that the ECB stands behind the government bonds as guarantor.
Not much changes for longer-dated 10-year government bonds either. The euro government bond corridor ranges from (-0.57 percent) Germany to Greece (+0.58 percent). If you have to pay an additional 0.02 percent interest per year on a 10-year government bond of Portugal, whose debt currently exceeds 130 percent, in order to park your money with this country, then this is absolutely alarming.
Except for price speculation, government bonds are therefore a dead asset class. If bonds, then the only options left are corporate bonds or special certificates that expert investors can put in their portfolios. But here, too, the interest rate environment is increasingly cutting off the air.
Investment emergency reaches new high
The result is that for years savers and people with bonds have been getting poorer and poorer. This is most evident in the case of life insurers, who are once again having to lower the guaranteed interest rate. From 0.9 to 0.25 percent, the guaranteed interest rate for contracts is to be reduced from 2022. Of course, this no longer has anything to do with asset protection, let alone asset accumulation.
Those who can – and who have sufficient knowledge – are saving themselves in material assets, above all shares. All that remains is the money of the central banks and insurers or pension funds, which manage the retirement provisions of private investors. We have been able to see the result for years now in the rising prices of shares, real estate, precious metals and bitcoin.
Suffering pressure could increase massively in the summer of 2021
If the repeatedly thematized inflation fears turn out to be true, bonds will no longer offer protection, unlike previous phases of higher inflation, such as in the 1970s. It is true that no one can say exactly when inflation will occur. Nevertheless, in the last few weeks, experts have been saying that the time could come as early as next spring/summer and that inflation will shoot up.
The argumentation: The Corona-related lockdown significantly reduces the velocity of money circulation, while at the same time pumping massive amounts of money into the markets and the real economy. If, when the lockdown ends, the velocity of money in circulation picks up abruptly, all that new money could float into the economy and cause higher inflation rates.
In the event that this scenario occurs, there should be a further influx of funds into real assets. After all, there has been virtually no inflation in the real economy in recent years, so the pressure of suffering has not yet been great enough for many investors. If asset inflation is now joined by inflation in the real economy, the zenith of monetary assets is likely to have been passed even for very immobile investors.
Staking as an experimental admixture
Those who don’t want to completely abandon „comfortable interest income“ despite withdrawing from monetary assets can take a look at the increasingly hyped staking of cryptocurrencies. In this process, investors deposit their staking cryptocurrencies in a smart contract to help secure and settle the blockchain network. In return, stakers can enjoy attractive interest income in the respective cryptocurrency.
The interest income from the transfer of cryptocurrencies can thus reveal a new market to innovation-savvy investors. As irrelevant as staking may currently be compared to the bond sector, this market is growing tremendously. Staking could become a serious investment environment in the coming years. So while it is currently primarily private investors who are getting involved here, this area could gradually open up to institutional investors as well.
Institutional investors: Is staking following the bitcoin hype?
Just as Bitcoin was in the hands of private investors for years, 2020 has brought the now definitive breakthrough for Bitcoin in institutional investing. Staking could undergo the same trajectory in the coming years.
Finally, decentralized networks are becoming increasingly important. To operate and secure these infrastructures in a decentralized manner, a consensus mechanism is needed. If you want to dispense with the energy-intensive Proof of Work (PoW) mechanism as in Bitcoin, then you quickly end up with Proof of Stake (PoS). The mechanism is becoming more and more relevant, especially due to the switch in Ethereum from PoW to PoS. In 2021, massive growth of the staking ecosystem and market capitalizations can be expected here.
Also interesting for DAX corporations
In addition, more and more professional providers are venturing into this area. These also include companies that are not primarily located in the crypto bull economy. Deutsche Telekom, for example, is involved in the staking sector with its subsidiary T-Systems.
What seems unusual at first glance makes perfect sense at second glance. Anyone who secures our communications infrastructure can also go one step further in value creation and contribute to the processing of value transactions. It doesn’t matter whether it’s a university, a hospital or an administrative authority: In the future, there will be more and more processing of decentralized transactions that will have to be handled or secured by staking providers. Both private and institutional players can then engage in these new networks to generate interest. The best part: Unlike government bonds, there are no negative interest rates for investors in the crypto economy (yet).