Investing in debt securities against inflation
Bond outlook
Thailand Bond Market
September 30, 2011 9:03 am
But rather than accepting the situation and doing nothing to combat the rising cost of living, investors should be looking for sources of higher returns to cover the effects of inflation pressure. Investing in debt securities is one possible source where risk is relatively low.
First of all, it helps to understand how inflation can impact our daily lives. High inflation usually occurs after economic expansion, and a simple example of its effects is a rise in food prices. Over the last 10 years, food prices have increased continually. A dish that sold for Bt15-20 a decade ago now typically costs Bt30-40. Travel costs are another obvious marker of inflation: bus fares have more than doubled for the same distance of travel.
Situations like these should spur us to find alternatives to increase our purchasing power.
Debt securities have become an interesting alternative for three main reasons. First, the rate of return on debt securities is higher than the inflation rate. Over the past eight years (2002-2010), only in 2005 were returns from debt securities lower than the inflation rate. For the remaining seven years, investing in debt securities brought higher returns than inflation.
Second, the rate of return on debt securities is higher than the interest rate on bank deposits. Comparing data from the same period (2002-2010), return on debt securities was usually higher than the two-year fixed-deposit interest rate.
Finally, the risk of investing in debt securities is low when compared to other channels of investments. In particular, the debt securities issued by the government are considered a risk-free instrument (with no default risk). However, investors must consider that debt securities still contain other risks, such as interest-rate risk and pre-payment risk.
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