Do Czech government bonds pay off? Yield vs risk

Do Czech government bonds pay off? Yield versus risk. The repeated state of emergency and the uncertain economic situation have changed the thinking of small savers and businesses alike. Money held in a term deposit or savings account is being drastically eroded by rising inflation. The key question remains how to save or invest safely and effectively. Investment funds offer attractive returns, but mostly over a longer time horizon. Are government bonds a suitable alternative?

What are government bonds?

These are specific securities issued by the state, which give you, as the holder, the right to demand repayment of the amount owed at the agreed value, and also to demand regular payment of returns (usually on an agreed date).  

This is how the state raises funds to cover sudden, high expenses (damage caused by floods, windstorms, or terrorist attacks), and in return, their holders have the chance to get an agreed return by “lending” their spare funds.

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Czech government bonds

The Ministry of Finance (Ministerstvo financí) issues several types of savings government bonds. As an investor, this gives you a way to choose the right option for your investment goal. You can choose between a reinvestment, variable rate, and anti-inflation bond.

Currently popular are the so-called anti-inflation bonds, whose job is to protect your money from losing value due to inflation. Unfortunately, due to the covid-19 pandemic, inflation climbed as high as 3.2%.

The conservative bond managed to fully outpace it over the previous two years. However, this puts banking institutions in particular at a disadvantage. Due to government measures, they were forced to cut interest rates on savings accounts and term deposits significantly.

Another proven, safe investment is also the Bond of the Republic (Dluhopis Republiky), designed directly for you. If you buy it through electronic access (using a bank identity or eIdentity), you have a chance to get it without any entry fees being charged. Another advantage is that you can sell it back almost any time, without penalties.

According to the contractually agreed maturity, we distinguish:

• Short-term bonds, which you can sell back within one year.
• Medium-term bonds issued for a period of one to ten years, which are among the most widely used.
• Long-term bonds for a period of ten years or more.

Are government bonds risky?

If you deposit your money in a current account, you have a guarantee of its protection up to EUR 100,000. With government bonds, however, the situation is different. There, the guarantee function is provided by the state itself. The same applies to deposits in building savings (stavební spoření).

Investing in a government bond should protect your money against rising inflation. However, there is a catch, namely the level of return. No one can take away your invested funds or your guaranteed return, but another investment might secure you a higher profit.

For a safe investment in government bonds, however, only use verified contractual distributors of the Ministry of Finance. This way you avoid the risk of buying bonds from fraudsters.

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How to buy government bonds

Issuing government bonds helps cover state spending, and nowadays ordinary citizens can buy government bonds too. Bonds are issued through the Czech National Bank (ČNB), which bears full responsibility for paying interest once the subscribed term has ended.

Where can you buy government bonds? Visit a branch of one of the official distributors, which are Česká spořitelna and ČSOB, or use electronic access to manage your securities account (if you buy a bond through a distributor at least once, the bank will set this up for you automatically).

The minimum investment is 1,000 CZK (about 46 USD) and the maximum is 5,000,000 CZK (about 230,000 USD). Setting up and maintaining the securities account is free, including changes of details or of the account holder. However, if bonds are transferred through a distributor, this transaction may carry a fee of up to 500 CZK (about 23 USD).

Be careful. Other transactions may also involve smaller fees. Before carrying out a transaction, it is a good idea to find out about them first and check the terms currently in force.

Does investing in the Bond of the Republic make sense?

The Bond of the Republic provides an anti-inflation return on your invested funds over a period of six years. The bond covers inflation and adds roughly half a percentage point of return on top. So at the current inflation rate of 3.2%, you can expect a return of 3.7%.

The rate of return on your invested funds mainly depends on how inflation develops and can vary, which is a key difference compared with building savings.

Setting up the Bond of the Republic is beneficial for anyone interested in investing in anti-inflation bonds, since they can only be subscribed to through electronic access to a securities account.

If your goal is maximum returns, look for a more aggressive investment option. Investing in silver or gold also tends to serve more as a way to protect value, but the financial market offers other alternatives too.

Small savers can rely on building savings and supplementary pension insurance (penzijní připojištění) for all family members, making the most of the state contributions.

For bolder investors, there are investments in shares, mutual funds, and bitcoin.

For wealthier investors, buying property remains a well-proven investment, whether for renovating and reselling it or combining it with renting it out. Rising property prices and mortgage rates are an incentive for you to buy.