One of the most unknown products by small and medium investors is undoubtedly the so-called patriotic bonds. So that you know a little better what this fixed income derivative product consists of, we are going to give you the keys to its structure and how you can hire it from now on. Because its name does not imply it is a eminently national product and that is configured in each of the autonomous communities of our country.
Patriotic bonds have had very negative publicity in recent years as a result of the many risks involved in their formalization. To the point that they could lose part of the invested capital and this is the real reason for presenting a higher interest rate than usual in these cases. As an incentive for them to be hired by small and medium investors. In any case, it should be emphasized that we are dealing with a fixed income product that is somewhat atypical.
Patriotic bonds are fundamentally characterized by their high volatility, even if they are linked to fixed income. In the sense that its profitability can vary significantly from one issue to another and within the same autonomous community. With differences that can reach several percentage points and that represent a lot of money in the investment carried out by small and medium investors. From this point of view, it can be said without fear of being wrong that it is a very fickle financial product and does not show the same uniformity over the years.
Patriotic Bonds: Latest Issues
At this time it is precisely the Autonomous Community of Madrid the one that has moved to the market when launching an investment product of these characteristics. Because in effect, a new issue of sustainable bonds “benchmark” of the Community of Madrid for an amount of 1.250 million euros has been admitted to trading on the BME AIAF Market. This is the fifth sustainable issuance that this Public Administration has registered in the AIAF market since 2016, which makes it a benchmark issuer in the field of sustainable finance and consolidates the AIAF Market as a benchmark in this type of issuance.
The bonds have an individual value of $1.000 and a fixed annual coupon of 1,571%. The final amortization date is April 30, 2029. On the other hand, it should be noted that the financial entities BBVA, HSBC, ING, Banco Sabadell and Banco Santander have acted as Bookrunners of the issue. Community of Madrid has ratings of Baa1, stable outlook, granted by Moody's; BBB +, stable outlook, by S&P, BBB, stable, by Fitch and A-, stable, by DBRS.
Green and social bonds
Gonzalo Gómez Retuerto, General Director of BME Renta Fija, points out that "Green and social bonds have become an asset class in themselves and are highly demanded by international investors". The total volume issued in 2018 of this type of assets exceeded 167.000 million dollars. "Spanish issuers occupy an outstanding sixth position in the international ranking." The Community of Madrid was the first Spanish Public Administration that requested to issue in the bond market for finance social projects specifically, demonstrating the great concern of the Community for non-strictly financial aspects such as climate change and development.
On this occasion, this modality in investment offers a profitability close to 1,50%, or what is the same, higher than that generated by the main banking products. Among them, time deposits, bank promissory notes or even high-yield accounts, in which all cases do not provide more than 0,75% in interest to their holders. However, the so-called patriotic bonds do not have a deposit guarantee fund, as is the case with term deposits. In the event of any incident that the issuing entities of this financial product may develop. In this case, the autonomous communities themselves.
Profitability of these bonds
The interest rate generated by this class of financial products is not always the same, not even in the same autonomous community. You can usually range between 1% and up to 8%. Where a strict maxim is fulfilled and is that as the risk is higher the profitability is higher. It is the strategy by which patriotic bonds are governed. In other words, if you want to obtain a more generous remuneration, you will have no choice but to take more risks. In some very high as a result of the state of indebtedness in which some autonomous communities of our country are.
On the other hand, it should be noted that your payment is at maturity, where their holders will receive their economic contributions plus their corresponding interests. In no case will there be a change in the interest rate offered to bank customers. It is completely immovable since we cannot forget that we are talking about a fixed income product. With its advantages and disadvantages and this is something that we must analyze from now on to determine whether or not it is advisable to hire it.
Advantages of local bonds
One of the contributions of patriotic bonds is that they can reach improve remuneration of the most conventional fixed income products. In some situations, with very substantial differences that arise from choosing this investment model despite the risks involved in its subscription. Another of its most relevant advantages derives from the fact that you have many bonuses of these characteristics to choose from. Practically all the autonomous communities of our country have a format like the one in question in this article. Basque Country, Catalonia, Andalusia, Navarra, La Rioja, Castilla y León, etc.
In any case, it does not mean that patriotic bonds are always available. Because it really is not this way, since its broadcast depends on financing needs of the autonomous community itself. And it may take a long time for them to carry out the issuance of these kinds of financial products. Beyond other technical considerations. The fact that we are dealing with a non-complex financial product also plays in its favor. It is very simple to formalize and does not require learning to understand all its mechanics.
Drawbacks of patriotics
While on the contrary, we must also take into account the shadows that patriotic bonds present and that are many, as you will be able to verify from these precise moments. Because the chances of default they are always latent and you run the serious risk from your financial contributions. Faced with financing problems of the autonomous community issuing some of these patriotic bonds. It is the toll that you will have to pay to obtain a return more adjusted to your personal interests.
On the other hand, we must not forget that this class of financial products usually require very long periods of permanence. Frequently above 3 or 4 years and that lead to you having to have the money immobilized for an excessive period of time. Of course, the ones you will not find will be very decisive periods, as happens with fixed-term bank deposits. Where you can invest your money in a few days or weeks. This, on the other hand, cannot be done in the so-called patriotic bonds.
Differences from one community to another
The offer that exists in this class of fixed income products is enormous, although it is not always available when you want it. Your profitability will be fixed and guaranteed, whatever happens in the financial markets. In this sense, there is no doubt that it can be considered as a safe haven product in the face of instability in the equity markets. With the risks that we have mentioned above and that should be analyzed because it is a very complex product from this point of view. It is not convenient to hire these bonds like that for the good. Not much less.
On the other hand, patriotic bonds cannot be canceled early, nor can you even renew them automatically. They are very special products that are governed by their own rules and above all by the economic conditions of the nation's own autonomous communities. That will be the ones that will ultimately determine your real profitability. Like the coupon that you will collect at the expiration of this model for the particular investment.
Where you will always detect that there are autonomous communities that are more reliable than others, but that therefore their annual interest will be less. This is the basis on which bonds are based and which is completely different from other fixed income derivatives. In any case, it is a new alternative that you have at the moment to make your available capital profitable from now on. Above other technical considerations that will be the subject of other analyzes for a better understanding by everyone.