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Bond marketsLevel 2Intermediate8 minUpdated Money markets, government bonds and corporate bonds
The bond market is not one thing. It is divided into layers that differ in both return and risk, from a cash-like parking spot to high-risk corporate debt.
- What the money market means and when it is an alternative to cash
- The differences between government, investment grade and high yield bonds
- What the shape of the yield curve tells you about the economy
Money markets: a sensible alternative to cash
The money market means very short, low-risk fixed-income instruments, typically with less than a year to maturity. A money market fund or a short-term bond ETF offers a running return close to the policy rate, with almost no duration risk, and is very liquid.
When short-term interest rates are high, this parking spot pays surprisingly well. It suits money you will need in the next few years or money waiting for an investment. It is not completely risk-free, but it is the calmest return-producing layer of a portfolio.
Three layers
| Return category | Indicative annual return | Who it may suit |
|---|---|---|
| Cash | 1.92% | Parking cash, high liquidity |
| Money market | 2.40% | An option with low interest rate risk |
| Short-term government bonds | 2.80% | Defensive bond exposure |
| Short-term corporate bonds | 3.20% | For those seeking a moderate extra return |
| Medium-term government bonds | 3.50% | A longer bond horizon |
| Long-term government bonds | 3.80% | For those who understand duration risk |
| Medium-term corporate bonds | 4.60% | For those seeking higher return potential |
The calculator is indicative. The return estimate is based on an indicative annual return (% APY) and does not take into account costs, taxes or changes in value. Past performance does not guarantee future performance. The value can go up or down.
Notice how the gap between categories grows with the amount. With a small amount, the difference between cash and a corporate bond is a few tens of euros a year; with tens of thousands it is hundreds. A higher return is not free, though: every step down the list adds either interest rate risk (duration) or credit risk.
This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.
The yield curve and its shapes
The yield curve shows how much bonds of different maturities yield. Its shape tells you what the market expects from the economy.
An upward-sloping, or normal, curve: long bonds yield more than short ones as compensation for a longer commitment. A sign of healthy growth expectations.
- Upward-sloping (normal): long bonds yield more than short ones; a sign of healthy growth expectations.
- Flat: short and long yields close to each other; uncertainty about the direction.
- Inverted: short bonds yield more than long ones; historically a warning sign of recession.
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