Government bonds of economically strong countries are among the safest ways to invest. They are instrument with a guaranteed yield and a guarantee of repayment as they are issued by the state. The population will obtain return from its funds on comparable terms to institutional investors.
Benefits of issuing retail government bonds
By issuing the retail bonds, the government diversifies its risks and achieves greater stability if the national debt is not held mostly by foreign investors but also by the citizens. Financing through this financial instrument represents an alternative to short-term financing for the government, even if it is only a complementary source of financing. Under certain market conditions, these sources can be more economic for the government than standard bonds.
Retail government bonds can suitably support the government’s long-term social policy objectives, as they can serve to support families through special savings bonds, for example at the birth of a child, or as an inflation safeguard or buffer at retirement.
In addition, the state also increases the financial literacy of the population, as it stimulates the population’s natural interest in learning about financial markets. The retail government bond provides an alternative to saving through fixed-term deposits, thus contributing to a change in the public’s apprehension of saving. At the same time, it leads to an increased interest in public affairs and thus to greater control of the government by the citizens.
Last but not least, the issuance of this investment instrument may support development of the domestic capital market by engaging existing infrastructure, increasing liquidity and the offer of financial products to the population.
On the other hand, the State is taking a major reputational risk, as in case the retail issuance of bonds was to fail, this would lead to further scepticism of the financial market by the population.
A strategic decision on possibility to issue the retail government bonds by the Slovak Republic has to be taken at the political level..
Basic characteristics of retail government bonds
Retail government bonds are issued in low denominations and there is generally no minimum amount to be invested; this is limited only by the nominal value of the bond. However, the government may set a maximum investment amount per individual. Unlike some commonly offered savings products, the amount of the bond yield is not derived from the total value of the government bonds purchased. For example, an owner of 5 000 units of government bonds will receive the same percentage return as an owner holding 500 000 units of the government bonds.
If retail government bonds are sold directly to citizens, without an intermediary, the investor pays no brokerage or service fees.
The low credit risk of this investment is balanced by the lower interest yield. In times of high inflation, government bonds may be of interest to residents as their yield is linked to inflation and should mitigate the adverse impact of inflation. A special type of retail government bond is a bond that does not have a maturity date (‘perpetuity’) and where the issuer commits to pay interest income permanently. Abroad we can also come across the tax-advantaged holdings of retail government bonds.
When issuing the government bonds, it is necessary to consider the legislative restrictions on investors – i.e. who can buy bonds intended for the public and how investors can be controlled, and to consider negative effects of such restriction. It is necessary to decide how the proceeds will be taxed and to establish clear legislative framework for transfer of bonds in case of inheritance, donating and sale and the use of bonds as collateral (mortgage). For example, the negotiability of retail government bonds can be limited or excluded by the government, except for inheritance. However, the issuer may allow early redemption of such bonds without financial penalty.
Slovak government bonds for population in the past
In the modern history of the Slovak capital market, the first issue of government bonds for the population was launched in 1998. The bond had a 1 year maturity and was issued in several denominations ranging from SKK 1 000 to SKK 100 000. The coupon yield was 17% p.a. and was tax exempt. The bond was issued in bearer form and was not publicly traded. Of the total issue value of SKK 2 billion, SKK 1 billion was sold.
Later, the government analysed the idea to offer an issue to the public in 2007 – 2008, and then in 2013 – 2016. Particularly in the second period, at a time of falling yields, the security issue was not cost effective, especially when the yields on standard bonds reached zero or fell below zero.
Experience from abroad
The Ministry of Finance of the Czech Republic (MoF CR) has issued several types of government bonds. Each investor can choose variant that best suits its investment plan. The MoF issues savings government bonds and so-called Republic Bonds.
The Republic Bonds can be subscribed or acquired only by natural persons. Savings government bonds can be acquired by natural persons, including foreign persons, citizens associations, trade unions, foundations, public universities and research institutions, counties, towns, municipalities, professional chambers and professional organisations, public service institutions (e.g. Czech Television), health insurance companies and other persons. The range of potential investors in savings government bonds is different for each issue.
Proceeds from issues of Republic Bonds issued before 1 January 2021 are exempt from income tax.
The total nominal value of the Czech Republic’s retail government bonds is CZK 90.1 billion and their share in the total government debt is 3.1%. The average age of the holder of these bonds is 56.9 years.
In Hungary, the retail debt programme represents an important financial source for the government. The payable amount of government retail debt securities at the end of April 2023 was HUF 8.953 billion, which is 19% of the government’s total debt. Savers increased their holdings of domestic government bonds by almost HUF 1.4 trillion in the second quarter of this year. Hungarian debt securities have maturities ranging from 1 to 19 years and, in addition to the book-entry form, paper savings bills are also issued. Retail government securities cannot be used as a collateral.
In Croatia, shortly after the country’s entry into the euro area, the government issued a 2-year government bond in early March 2023, intended mainly for the population. Natural persons subscribed government bonds in amount of EUR 1.3 billion. The yield on Croatian retail bonds is tax exempt.
Currently, Belgium has raised a record sum of €21.9 billion from savers in bond sales to put pressure on banks to raise the interest rates on deposits. The sale of one-year government bonds was launched on 24 August 2023. The bond earns an interest rate of 3.3 per cent. To stimulate attractiveness of the retail government bonds, the Belgian government has proposed a law that reduces withholding tax that buyers will pay on the proceeds.
Sources: In the article were used information from ARDAL’s presentation “Retail Bonds” given at the Capital Market 2023 conference, from website on the Czech government bonds and other sources.
Author: Dagmar Kopuncová
