Government bonds do not pay off. It will not protect money from inflation

February 10, 2022

Most government bonds do not yield even half of inflation. An exception was the anti-inflation state bond ‘Republika’, which the Ministry of Finance does not sell anymore.


BRNO – According to the Ministry of Finance, a record was set at the end of last year. Czechs bought government bonds for over 41 billion crowns, which could be attributed to the fear of inflation. People are looking for a way to protect their savings, and at first glance a government bond seems to be an ideal investment with minimal risk. But the anti-inflationary state Bond Republic was the only one that made financial sense. It provided investors with a 0.5% return on the inflation announced by the Czech Statistical Office. Unfortunately, the new Minister of Finance, Zbyněk Stanjura, stopped the sale immediately after taking office and canceled further issues of the Republic.

How are the rest of the government bonds? Their yield ranges from 0.05% to 2.75% per annum. The government bond with ISIN CZ0001002059 will have the highest yield with an interest rate of 4.85%. The auction is scheduled for February 23 but is limited to an amount of 500 million crowns.

For comparison, according to the latest forecast by the Czech National Bank, annual inflation will reach 8.5%. This estimate is in line with similar data from the Czech Statistical Office, according to which inflation in the Czech Republic in December 2021 reached 6.6% year on year. This means that most government bonds do not yield even one third of the current inflation rate.

The question of whether government bonds are advantageous can be easily answered: No, the bonds of the republic will not pay off. It does not prevent the devaluation of money.

Inflation is a global problem, the CNB was among the first to react. 

Economies around the world are facing rising inflation. To prevent further negative developments, central banks in individual regions are tightening monetary policy by raising interest rates. The Czech National Bank was the first to react, raising interest rates sharply to the current level in a matter of weeks in their effort to slow down or stop inflation. The basic interest rate, known in the Czech Republic as the 2W Repo rate, has been 4.50% per annum since 4th February, the Lombard rate has risen to 5.50% and the discount rate is 3.50% p.a.

These interest rates are among the highest in the European Union. Compared to the euro zone, they are at a record high, as the European Central Bank has kept the key interest rate at zero and the depository continues to show a negative or a negative rate of -0.5% per year.

According to economic correspondents, the US Federal Reserve is preparing to raise interest rates at its March meeting. The next three increases are expected to take place during 2022. However, for the time being, the Fed keeps the key interest rate close to zero, ranging from 0.00% to 0.25% per year.

Inflation in the US reached 7.0% year on year in December. Estimates for January 2022 show a slight increase to 7.3% year on year.