What dangers do the issues of bonds dedicated to the population hide?

The Ministry of Finance has recently announced that it is preparing a bonds issue aimed at retail investors, in other words any citizen that has at least 1,000 lei available, the face value of such a security.

The bonds will be sold through the BSE, and according to the financial press, Lucian Anghel, the president of the Stock Exchange, had the following to say: "We want to develop the market for government bonds into a viable alternative to bank deposits", as the financial press writes.

In a comment on an article dedicated to this bonds issue, the reader of a financial website writes that "the bonds are very liquid and stable, so they basically act like a current account".

Unfortunately, placing the money in government bonds is completely different than saving through bank deposits. The investor will only receive the face value upon maturity, which is far more distant than that of a regular deposit, but until then, the market bond price can experience major fluctuations, depending on the evolution of the interest rates.

In the case of fixed income securities, such as government bonds, their market value is inversely correlated to the evolution of the interest rates. In other words, the price of the bonds drops when then the interest rate increases and vice-versa.

For example, upon the issue of new bonds investors are presented a number of basic pieces of information, such as the coupon (author's note: the annually paid interest rate, which is usually fixed until maturity), the face value and the maturity.

Let's assume that the face value is 1,000 lei, and the coupon rate is 6%. If the market price reaches 800 lei, then the yield of the bond will increase to 7.5%, because the investors will earn an annual coupon of 60 lei for a security for which they paid 800 lei. If the price increases to 1,200 lei, then the yield will decrease to 5%. What kind of sight deposit is worth 1,000 lei one day, and only 800 tomorrow?

Regardless of how much the investor pays for a government bond with a face value of 1,000 lei, keeping it until maturity ensures that their principal will be returned, together with the amounts of the coupons. But nobody guarantees the purchasing power of the principal upon maturity.

This is one of the reasons why government bonds have been known, for a few decades now, as "certificates of guaranteed confiscation". Another way that the confiscation operates is represented by the raising of taxes as time goes by to cover the new debts.

What is curious is the fact that the announcement of the Ministry of Finance came shortly before the failure of a an auction for bonds with June 24th, 2019 maturity. Those bonds have a coupon of 4.25%, and the bonds issue of mid-July was fully bought by banks (500 million lei) for a coupon of 3.3%.

Why haven't banks accepted the recent bonds issue, especially since the National Bank has manifested its intention to further cut the policy rate? Could it be that they lack confidence that the interest rates will continue to drop, amid the signals from the international markets concerning the increase of financing costs in emerging economies?

"Polish government bonds have seen the biggest drop in the last six months, amid speculation for the need of new monetary stimuli, but especially around the moment when the Federal Reserve decides to start raising the interest rates", as written in a recent article published on Bloomberg.

Market analysts consider that Poland's long term bonds have merely suffered a correction, as the "GDP of the United States and the Fed are the main factors for the evolution of the bonds", as Bloomberg writes.

As the official interest rates in Romania are at a historic low, amid the failure to meet the tax collection targets, especially in the case of VAT, it can be expected that the government bonds "dedicated" to the population are securities with a very high risk profile, given the maturity and the yield that was written about in the press.

Aside from those elements, as well as beyond the moral aspect of the investment in those kinds of securities, (author's note: which I wrote about in "Cutting the interest rate can not restart the seized up engine of the economy", BURSA, August 5th, 2014) another question arises as well. Can the BSE provide all the information that those who invest in that kind of securities need?

It is enough for instance to compare the information supplied by the Frankfurt Stock Exchange for bonds issued by the Romanian government in Euros and the maturity of June 18th, 2018 (author's note ISIN XS0371163600) to those provided by the BSE for the RO1215DBN073 ISIN (author's note: ISIN is the acronym for International Securities Identification Number, a unique code for identifying securities).

The price of bonds in Frankfurt shows a significant volatility (see chart: the price is expressed, according to the conventions for bonds, as a percentage of their face value), posting a significant rise since the beginning of the year, to 117.955 at the end of last week.

According to the prospectus, the issue XS0371163600 has a face value of 1,000 Euros and a coupon of 6.5%. The total amount of the issue is 1.5 billion Euros, and it is governed by British legislation. "The UK courts have the exclusive jurisdiction for resolving any disputes arising from the present deeds", the prospectus states.

The last specification, concerning the applicable legislation, is extremely important, because in the case of Greece, the haircut applied to the bonds which were governed by the local legislation.

The price which the Romanian bonds have traded at in Frankfurt on the first day of August shows that the coupon was 1.687%, information being supplied for their duration as well (author's note: a gauge of the sensitivity of the price of bonds to the change in interest rates) or the accrued interest. The Frankfurt Stock Exchange also provided an online calculator to determine yield of the bonds depending on price and other market factors.

Almost none of that data is available on the website of the BSE. Will investors have to maintain a permanent contact with their brokers (author's note; I heard that Harinvest, a company regulated by the ASF, offers "premium" services) to see how well these "alternatives" to bank deposits are doing?

Of course, bank deposits aren't what they used to be. The last cut of the interest rate will lead to a new significant drop of the passive interest rates, and the citizens will be backed into a corner even harder through the financial repression coordinated by the NBR and the government.

But that doesn't mean that government bonds represent an investment alternative for the population, especially when governor Mugur Isărescu is asking the ECB for access to the emergency financing in Euros for banks who are still controlled by Romanian capital.

And the National Bank of Romania should at least express its concern over the government's "initiative", considering that it still has a lot to do to improve the financial education of the population, and government bonds aren't exactly easy to understand securities.

If the NBR will support the issue of bonds to the population as well, then we will know that the Ponzi scheme that the governments have been conducting in the last 25 years is nearing its end. All that is left for us to do is to hope that the readers of "BURSA" will not become "accomplices" in the new financial scheme and also, they won't be among those throwing their money down the drain for patriotic reasons.