This summer, while many of us were taking a vacation through the beautiful and pristine mountains and beaches in Europe, the EU’s financial market crashed faster than a man finishing his Pint of German larger.

What happened?

Europe’s debt has always had a geographic split with a much of balanced system in the South, the system of the EU caused german banks to load up on sovereign debt through bonds as if there was no risk. However this summer many people were given a wake up call as the southern yield slowly converged towards those in the North. This caused many people to realize that even no debt isn’t risk free.

Why it happened? 

The financial tools used in today’s world might be better than they were, however people still make mistakes. When people calculated the yields they would receive on different bonds, they forgot to take things such as inflation into account. In simple terms if a bong had a yield of around 6% and the inflation rate during that period of time was 8% then the final yield would only be -2%.

In effect this would cause people to default and though this is not the case for many of the large countries it has had an effect. For everyday investors however, this only applies if they hold the bond to maturity, unfortunately that is harder said than done. Most investors tend to sell bonds, mostly Italian and Greek bonds, however the profit they make on that is only the change in price from when the bond was bought and being that these prices tend to be very volatile, the risk involved is very high.

In Conclusion…

As a first year, it is important for my view as well as that of my peers to change with regard to the risk involved with buying into debt. People should start to change their view on bonds, as they do hold a little more risk as many people assume. However, though this crisis does highlight the weaknesses of investing in bonds, one must only be wary when they do invest in them rather than try avoid them.