The risk premium is an economic data, which for several years has been in all the economic information communication media. It has been assimilated to inflation, economic growth, oil, and even international stock indexes. And that led to the peripheral countries of the European Union being in a difficult economic positionSome of them were even intervened by the community authorities. Not surprisingly, I led them to have their risk premium skyrocket to more than 500 points, and even much more in the most problematic.
However, many sectors of society still do not know the meaning of what the risk premium is. Well, this economic term is the profit margin between a country (Spain, Italy, Portugal, Ireland, France ...) and the reference (Germany). While the German bond (bund) at 10 years currently pays an interest close to 1,537%, Spanish is in the 2% range. The differential resulting from this operation would currently be around 145 basis points, which is the current risk premium for Spanish public debt.
As the risk premium is higher the economic problems it has are greater, and especially its difficulties to finance itself in the markets, as has been seen in recent years in the euro zone. Not surprisingly, this economic parameter was in all the headlines of the Spanish press. And of course, that when the 600 points are crossed, there is a serious risk that the country will be intervened.
It is enough to remember that the risk premium for Greece and Portugal reached levels above 1.000 points. And in the specific case of Spain at its maximum levels, around 600, back in 2012. Therefore, we are talking about a data of great importance for the economy of the countries, and that is looked at with a magnifying glass by the rating agencies and financial intermediaries of any nature.
The risk premium, can it be used for investment?
However, the risk premium has become an element, little less than essential to carry out any kind of investments, not only in the variable income, but especially the derivatives of the fixed. The evolution of the stock markets has depended a lot on the points that the risk of a country marked at each moment. At a higher level of its premium, the decline in the stock markets sharpened considerably, and vice versa.
As a consequence of this trend, this unique strategy can be used to make the savings of small investors profitable.. Influencing markets where risk increases or decreases above other more stable ones. And that can be used very easily by users in this type of operation. Not surprisingly, during the preceding years significant capital gains have been obtained through this investment strategy.
One of the sectors most sensitive to the risk premium, and how could it be otherwise, is the banking sector, and by extension the entire financial sector in general. With very notable fluctuations depending on the evolution of this important economic parameter. And that they have led to their shares depreciate and appreciate at levels close to 5%, even above on certain occasions. In any case, higher than those shown in the other equity segments. The Spanish stock market has been the most exposed to these variations generated from the financial markets. Especially when your risk premium exceeded the 400 point barrier.
How to trade with this data?
The risk premium serves, not only to trade equities, but in other financial products, including investment funds. Also in more specific ones such as public bonds, which you can subscribe directly, without any kind of intermediaries. To finally form a broad investment portfolio based on the risk premium as a selection element. And all this, although at the moment it is under a certain stability at the levels presented by the main EU countries, when volatility is present in the financial markets.
As a consequence of this strategy, the fact that a country's differential is narrowing with respect to Germany is undoubtedly good economic news, which should boost equity markets, or at least stabilize them. Anyway, can be used through other products intended for investment. And that perhaps you can collect yourself to try to enhance the heritage. With no other objective than to take advantage of this situation.
Investment funds
These movements can be collected by these products, in their fixed income modalities. How? Well, fundamentally using two different strategies, but at the same time complementary. On one side, taking refuge in the German bond when there is a rise in the yield of peripheral bonds (Spain, Portugal, Italy, etc.). In this sense, it would be configured as a safe haven in the financial markets. Of the few that remain of these characteristics.
And on the other, taking advantage of the high yields they offer, and that is reflected in their stability. Assuming, in many cases, real business opportunities in this area of investment. There are many investment funds that import this trend, and that can be very favorable to your interests at certain times of the year.
Not very strange that provide an annual return that can approach two digits. Although it is also very important to withdraw on time, that is, to undo positions, when the objectives are met. It is because when these levels are reached it is already very difficult to continue generating returns in the funds, and if instead very severe corrections that may affect the investment portfolio that you have constituted.
The best way to avoid these problems is to diversify investment in various funds of diverse nature, even that come from equities or other alternative modalities. It will be the best way to protect your interests, and even with very interesting returns, and above other more sophisticated strategies in its development.
Mixed funds
Another option that the markets offer you is the contracting of products of these characteristics. It also serves as a complement to diversification. But in this case, combining fixed income with variable income. Public debt from peripheral countries (Spain, Italy, France, Greece and Portugal) should not be lacking in its composition, allowing you to complement your proposals on the main financial assets. And whose level of risk will depend on the investor profile you present: moderate, intermediate or aggressive. And maybe even the level of risk you can assume in operations.
A good part of these financial products include in their formats the so-called peripheral bonds, so that the client can take advantage of the rise in the risk premium in those countries. And under a proportion that will depend on the selected background. It is not always the same, nor is the nature of it. So you will have no choice but to study the offer offered by the management companies.
Buying bonds
The last recourse will always be the direct purchase of these financial assets in the markets. It will be a more forceful action, and exposed to greater risks by hiring. The best strategy to formalize this taking of positions in peripheral bonds will reside in the best route they have and, therefore, the broader the options to make the savings profitable. You can choose a wide variety of public debt, both nationally and from other countries of the European Union, even through very expansive purchases.
However, the risks are higher, and you may even have to rush excessively long deadlines, in which the situation can change at any time. Although in return, the performance will be assured from the moment you hire them. It will not be spectacular, far from it, but it will be a weapon to provide you with better returns than through other banking products.
And where, in any case, they will be very affordable financial assets to your interests as a client, being able to make the contributions that you consider necessary at any time. From the most conservative to the most aggressive, although the latter are not recommended in the current circumstances. But it will be one more option you have to invest your savings based on the risk premium of the EU countries. With a wide range of proposals, which you can accept from now on.
Safe haven investments
Under this denomination are registered the bonds that can serve to protect themselves from scenarios of great volatility, and also immersed under a notable economic uncertainty. On the one hand, the German bond that has a permanent safe haven value in this situations. Mainly due to the credibility of its economic policy. And on the other hand, the peripheral countries, which can generate significant upward movements in their bonds, and as a consequence of the continuous fluctuations in their risk premium.
From this scenario that we have exposed to you, there is no doubt that you have another alternative, perhaps the one you did not have, to obtain a greater benefit from the markets. And that in one way or another is linked to the risk premium. They may not even be able to imagine this opportunity that is open to your claims as a medium saver. Not in vain, at any time you can use it, or complement it together with other financial assets of a different nature.