Bonds are becoming an increasingly popular asset. But what is it really? What is the impact of the current situation on this investment? Here are some explanations.

A few general points about bonds

Without realising it, many French investors are affected by the bond market. In fact, the interest generated by the euro fund, which is the secure 'pocket' of the life insurance policy, is linked to bond yields. Why is this? Because even though each insurer offers its own euro fund, the mandatory capital guarantee encourages them to invest in low-volatility, low-risk assets. That's why, in practice, they are made up of around 80% bonds on average. To limit risk, these are mainly government bonds known as OATs (Obligations Assimilables du Trésor) or bonds issued by large, solid companies.

More specifically, what are bonds?

Unlike a share, which is a share in a company, a bond is a share in the debt of the company or government that issued it. This debt security operates in a similar way to a bullet loan. In other words, the investor "lends" his funds, through his investment, over a fixed period. During this period, they will receive interest, known as coupons, at regular intervals (monthly, quarterly, annually, etc.). At maturity, the loan must be repaid in full by the government or the company.

The main criteria for a bond are therefore the interest rate, the duration and the quality of the issuer. Everything is linked because it is a global approach. For example, when a young company in a growth phase raises funds via bonds, it will offer high interest rates to compensate for a higher risk of default than a very reputable and financially solid company, all other things being equal.

What impact does inflation have on the bond market?

Today, governments and companies that issue bonds are forced to offer high yields because they are higher than current inflation. The counter-effect of this increase is a fall in the value, on the secondary market, of bonds issued "yesterday". Why should this be?

If the French government issues a bond today worth €100 and pays 4% per annum for 8 years, the bond issued 2 years ago, which also has 8 years to run, pays 1% and was worth €100 at the time of purchase, loses value on the secondary market because the new bond pays much more.

Numerous criteria are important in assessing the quality of a bond and its suitability for investors. In an unpredictable economic climate, there are strategies for controlling risk and optimising the return on your investments. The financial investment specialists at Wealth A7's Wealth Management practice can help you benefit from these strategies, and provide you with support and advice - contact us!

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