Assessing Risk and Return for Investors in Bank and Sovereign Debt
- 10 Downloads
Global bank and sovereign debt together comprise by far the largest sector of the investment market. By comparison the global equity market is smaller. The relative importance of each sector can be seen Figure 1.1. Sovereign debt has also, the eurozone excepted, been the asset class which has given by far the highest return to investors since 2000. In contrast equities have been a great disappointment to almost all investors over that period as has bank debt. Any investor, therefore, has to consider these two large asset classes — sovereign debt and bank debt — as potentially important components of any portfolio. Though I have noted that sovereign debt has been the best performing asset class, within that class clearly urozone debt has proved to be very risky, quite the opposite of what traditional finance assumes about developed market sovereign debt, i.e. being the riskless asset. Equally, bank debt or at least senior debt, has been assumed to be almost riskless due to the ‘too large to fail’ doctrine employed by governments. However, that doctrine is in the course of being modified in ways that may in future lead to losses even on senior debt but certainly on junior debt. Any investor, therefore, has to know how to assess risk on individual instruments within these two asset classes and to know when it may be appropriate to disinvest from them and, equally, to spot opportunities when they arise for highly profitable trades.
Unable to display preview. Download preview PDF.