Definition of risk-free asset

Risk-free assets are those whose rate of return is seen as certain and are generally defined as high quality government bonds. However, as the eurozone sovereign debt crisis progressed in 2012 analysts and investors increasingly questioned not only whether weaker eurozone sovereign credits were risk free; they extended their concerns to US Treasuries and UK gilts.

Risk-free assets are defined by the Bank for International Settlements, the central bankers' bank based in Basel, which assesses the risk weightings of all classes of assets that might be held by a bank. It uses the term risk free to describe assets associated with a sufficiently high probability of creditors being repaid to allow credit risk not to be explicitly taken into account in investment decisions by market participants.

 

Risk-free assets in the news

At the end of 2012, while there was a widespread perception that the pool of safe assets was shrinking, public sector debt  in the developed world , including the supply so-called risk-free Treasuries and gilts, was soaring. Many economists argued there was no such thing as a risk-free asset. However others argued that the ongoing demand for Treasuries whenever there is a risk-off period shows most investors still regard them as the ultimate haven asset.

Similar definitions of risk-free assets are used by pension funds who must satisfy national regulators that they hold sufficient assets to cover future liabilities. They use the risk-free rate, generally defined as the yield on high-quality government bonds, to calculate their ability to cover future liabilities.

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