Current Bank short interest rates are negative. What that means is that you are paying banks to keep your money there.
They also want you to buy bonds. Corporate high yield bonds. Do you know what that means?
That's right: "Junk Bonds". Lending money to companies with a credit rating not so good, and actually expect to get you money back, when most will default.
Let's say you lend $10,000 to someone for 5 years.
All you can expect is to get your money back, plus some interest.
But 10,000 in 5 years is not worth $10,000. It is worth much less due to the impact of inflation, because inflation decreases the value of the currency over time.
There are two main primary risks that must be assessed when investing in bonds: interest rate risk and credit default risk.
Interest risk is the risk of the bond price change due to the change in interest rate.
The yield you get out of a bond is inversely related to the price you pay. So when the price gets higher, the yield drops.
Investors require a high yield for junk-bonds, because there is a higher risk of default.
You are essentially lending your money to a company with a high risk of default, so you ask for a higher interest rate.
With inflation, the purchasing power of the bonds coupon payments erode, because the value of the currency is worth less.
Companies want your money now, but will pay you if at all, something that is worth much, much less in the future.
It never ceases to amaze me that people keep buying bonds and expect for the best, when the exact same opposite happens.
The definition of insanity is to keep doing the same thing over and over and expect the same results.
Since companies need your money and are pretty much not interested in helping you understand what they are asking of you, they came up with this new concept: Introducing Green Bonds!! Weheeeee!!!
"Greed is Good". In this case "Green is Good?" Not really. Keep reading.
So what is a Green Bond you might ask? Good question.
A Green Bond is a loan you make to a company that doesn't develop tobacco or any other type of thing that is bad for the environment. That is what they tell you.
The real story, is that you will find a lot of banks, financial institutions , car makers, the World Bank as "constituents" of the "Green Bond"
No bank cares about your business. They care about liquidity and still getting rid of the toxic assets they still have.
Sustainable energy is the future, no doubt. I am all for it, don't get me wrong.
But i have my doubts on this "initiative".
The majority of the companies are banks and corporate entities.
With Short Term Interest Rates in historical lows, it is pretty much a safe assumption that you are overpaying, because as the interest rates go down, bonds prices go up.
If you are overpaying for something, getting a lower return and the demand keeps going up, guess what?
Still doing a lot of research, and you have to do your own as well. But coming from a Euronext Conference held by the biggest bank in Portugal, telling people how great Green Bonds are... it's like my mentor says: "History is not the same but it rhymes".
At this point i am Short the Bond Market. It is becoming pretty obvious there is a bubble here.
Be Great. Nothing else pays.