Government debt may not be risk-free
The safest place to be is in the short term is senior ranking debt to companies or securities backed by hard assets, non-cyclical businesses and with limited leverage. By having near-term maturities, the capital price movements (mark to market) should be minimal and liquidity will be better. Having a near-term maturity allows for reinvestment in assets at potentially lower future prices. It is often assumed that government debt is the safest place to be in times of trouble. The ever increasing levels of government debt and the wave of quantitative easing means investors must be careful which countries and currencies they are exposed to. The risks associated with government debt issued by emerging markets, Japan and the weaker European economies (Italy, Spain, Portugal) are currently underestimated by many investors. These combine elevated risks on both the ability of the government to repay and the potential for a large currency devaluation.
Narrow Road Capital is a credit manager with a track record of higher returns and lower fees on Australian credit investments. Clients include institutions, not for profits and family offices.