Losing money with state debt

One of the investment options we have is sovereign debt. It is not usually the first one we think of, but being creditors of Spain, Italy, or the United States is an option we have on the table.

Buying debt, and we will take the Spanish State as an example, can be done in the short term with Treasury bills or, in the long term, with bonds or obligations of up to 50 years. In the case of bonds and obligations, we normally collect interest periodically and, at maturity, the principal is returned to us. That is to say, you lend 100 euros to the State, you collect interest every year, and, after 10 years, they return your 100 euros. And here you will think: but my 100 euros from the beginning are not worth the same as my 100 euros after 10 years. Precisely for this reason, the return we obtain from the bond should compensate for the inflation of the period. Many people think that you cannot lose money with fixed income, but, if inflation is higher than the return obtained, we will have a negative real return.

As an example, nowadays, the 10-year Spanish bond offers a return of around 4.07% annually. August's inflation was 4.3%. With current data, therefore, an investor who bought this bond and held it for one year with a return of 4.07% would have a negative real return if inflation remained at these levels. And let's also consider that in 2022 the return on the 10-year Spanish bond reached close to 0%. Its return does not compensate for the inflation of the period.

The main objective of this article is to demonstrate that, surely, a state will pay its debts and you will recover your nominal money, yes. But it is also true that fixed income is not fixed, it is not always safe, and, even though you may recover your initial 100 euros, the return you obtain should be sufficient to, at the very least, preserve its purchasing power.