In comparison with other classes of bonds, the risks inherent in eurozone government bonds are relatively limited.
- Low insolvency risk: the State is generally viewed as the best possible debtor. The ratings attributed by rating agencies also give investors an idea of the solvency of the issuing country.
- Very limited liquidity risk: the large volume of long-term public debt of most EMU members ensures good liquidity for sovereign bonds on the secondary market and greatly reduces counterparty risk.
- Exchange risk for government loans denominated in foreign currencies. Exchange risk means that on redemption the investor may receive an amount in euros that is less than the initial euro investment.
- Interest-rate risk: the price of a government bond fluctuates in line with market conditions.
To achieve a higher return, an investor can diversify his sovereign bond portfolio by including bonds issued by governments outside the eurozone. He must then be aware of the fact that the risks to which he is exposed will also be higher, a higher yield generally going hand in hand with high volatility. To manage risk effectively, a private investor may resort to a bond fund, which provides him with broad diversification even with limited capital.