Even though individual countries in Europe still have national bond markets where governments, sub sovereign entities and corporations in residence issue bonds, and individual investors participate, the European market, especially across the Euro-zone countries, is increasingly acting like one market.

The primary advantage of considering investing in government bonds is comparative safety of the investment, in particular, the promise that interest and principal will be paid on time.

Payments of straight government bonds are predictable; many people invest in them to preserve and increase their capital and to receive a dependable income stream—to help meet living expenses during retirement, for example, or to fund specific objectives.

Government bonds are available with a wide range of maturity dates. This allows an investor to structure a portfolio to achieve financial goals at specific time horizons.

Investors are effectively guaranteed to receive interest and principal as promised; the underlying value of the bond itself may change depending on the direction of interest rates. As with all fixed-income securities, if interest rates in general rise after a government bond security is issued, the value of the issued security will fall, since bonds paying higher rates will come into the market.

If interest rates fall, the value of the older, higher-paying bond will rise in comparison with new issues. The interest payable (called the coupon) will remain the same for the investor assuming it is a fixed rate bond; only its value will change if you sell it before maturity.

The bond market is liquid and accessible to both institutional investors and individual investors, it’s a market where there are ready buyers and sellers willing to trade at competitive prices for both institutional investors such as pension funds and insurance companies but also individual investors.

Risks Associated with European Government Bonds

Market risk: the value of assets in the Portfolio is typically dictated by a number of factors, including the confidence levels of the market in which they are traded.

Operational risk: material losses to the Portfolio may arise as a result of human error, system and/or process failures, inadequate procedures or controls.

Liquidity risk: the Portfolio may not always find another party willing to purchase an asset that the Portfolio wants to sell which could impact the Portfolio’s ability to meet redemption requests on demand.

Exchange rate risk: changes in exchange rates may reduce or increase the returns an investor might expect to receive independent of the performance of such assets. If applicable, investment techniques used to attempt to reduce the risk of currency movements (hedging), may not be effective. Hedging also involves additional risks associated with derivatives.

Custodian risk: insolvency, breaches of duty of care or misconduct of a custodian or sub custodian responsible for the safekeeping of the Portfolio’s assets can result in loss to the Portfolio.

Interest rate risk: when interest rates rise, bond prices fall, reflecting the ability of investors to obtain a more attractive rate of interest on their money elsewhere. Bond prices are therefore subject to movements in interest rates which may move for a number of reasons, political as well as economic.

Credit risk: The failure of a counterparty or an issuer of a financial asset held within the Portfolio to meet its payment obligations will have a negative impact on the Portfolio.

Derivatives risk: certain derivatives may result in losses greater than the amount originally invested.

Counterparty risk: a party that the Portfolio transacts with may fail to meet its obligations which could cause losses.