Risks of investing in European bonds
As with many other areas of investment, European bonds can be a great resource for wealth creation. If the investor knows where and what to look for.
However, obtaining acceptable yields on bonds alone is now difficult to predict. The value of these securities rose, while the yield declined. Of course, it cannot be argued that bonds no longer have value.
Even now, there are some segments of the bond market that still provide an adequate risk / reward ratio. First of all, these are individual sectors of emerging markets .
In order to effectively use this asset class, even though it has become less attractive now, I recommend paying attention not only to debt securities of the American market, but also to European bonds.
What are European bonds?
European bonds, like any other issued debt securities, are a form of long-term debt that involves the payment of interest payments and the return of the original investment at a predetermined date.
In other words, investors buy debt in exchange for a guaranteed return based on fixed interest rates by lending money for a specified period of time. Using this mechanism, governments and corporations can borrow money to finance large projects and enterprise development.
Considering the European bond market, it is important to note its diversity. There are many bonds available to investors, as well as many different sources that issue them.
Unfortunately, the main segments of the fixed income market now look expensive and bond yields are not high enough to offset potential risks and losses.
The defensive properties of this type of securities, which previously provided positive returns even during periods of market turbulence, are now weakened by near-zero base rates.
Major categories of bonds in the European market
1. Government bonds
They are generally considered the safest investments. The value of these bonds is maintained thanks to government support. They are issued by countries and are paid mainly in local currency. The stability of bonds is based on the stability of the state.
It is unlikely that a European country or the entire European Union will go bankrupt, making these securities a safe place to keep money. However, the yield on these bonds is usually quite low, which often leads to the loss of their attractiveness for investors.
2. Corporate bonds
These bonds are usually directly related to the success of the corporation. Investors like them even more than many stocks because of:
- relatively short maturities;
- higher yield in comparison with government bonds.
3. Municipal bonds
It is a local version of a government bond issued by regional and local governments to finance infrastructure projects. Many of them provide tax breaks for investors. In European countries, this mechanism is widely used to attract investor funds for the implementation of local projects.
4. Bonds with offer
This type of security allows the issuer to redeem a bond before a specified maturity date. Given that bonds are mostly debt, it seems counterintuitive that the issuer is unwilling to wait for the maturity date.
Some bond issuers use this method as a way to place short-term debt until the market becomes more favorable or recovers.
Globally, the bond market accounts for over $ 100 trillion. Although the exact numbers cannot be calculated due to unregistered bonds, Europe accounts for roughly 30% of the global bond market.
Bond Markets for Specific European Countries
Investors would be wise to view Europe as a group of countries with unique opportunities to issue sovereign bonds, rather than as a single issuing organization known as the EU.
The German government is selling 10-30 year old Bunds to finance the costs of its projects or to raise money to pay off debts. They are characterized by:
fixed interest rate
the possibility of their acquisition by a private investor by registering a claim in the country's debt register, rather than buying a certificate.
Some investment experts are touting the German bond market because of its strong and steady growth. Although the annual return on these bonds can be quite low. As 2020 has shown, profitability may drop to zero.
The French government provides investors with the ability to convert cash into securities and vice versa at any time. France issues two debt tracts that include treasury securities known as OATs and BTFs.
Recently, there have been concerns about the French bond market due to an alleged glut of private debt.
3. United Kingdom
The British government issues government bonds in the UK, India and several other Commonwealth countries, known as "gold plated" bonds. This is the equivalent of US Treasury securities.
The term "gilts" is often used informally to describe any UK bond that has a very low risk of default and a correspondingly low rate of return.
They are called gilded because the original certificates issued by the British government used to have gilded edges.
There are two types of Her Majesty's government debt securities:
- the first are ordinary investments with the aim of obtaining a fixed income;
- the latter are linked to indices.
Private investors can purchase gilts through the UK Debt Management Office or an authorized broker.
Recent inflationary forecasts are negatively affecting the UK government gilding, which is tied to interest rates and inflation indices. Her Majesty's two-year and 10-year bonds have been hit hard by the pandemic.
Italy is one of the world's largest bond markets. In addition to the problems created by the coronavirus pandemic, anti-European sentiment is strong enough in the country. In this connection, one cannot seriously talk about the reliability of these securities.
Best European Treasury ETFs for 2021
European government bonds are generally considered to be riskier than US government bonds.
In 2020, the coronavirus pandemic plunged the global economy into recession, and central banks (the Federal Reserve and the European Central Bank) took action to bolster markets and lower interest rates. Brexit has also done its part in creating an atmosphere of uncertainty in the securities market.
Anxiety and uncertainty over the economic downturn and potential recovery have led to increased investment flows in safe-haven assets, including European government bonds. Eurobond prices rose sharply in 2020, and bond yields fell to historic lows.
Below are four of the best international exchange-traded funds dealing with European government bonds. They were selected on the basis of long-term stability and taking into account the volume of assets managed.
ETF with European bonds
1.iShares International Treasury Bond (IGOV)
iShares International Treasury Bond (IGOV) is an ETF that deals with bonds denominated in local currencies. IGOV tracks the S&P / Citigroup Ex-US International Treasury Index.
The ETF includes bonds from Denmark and Sweden, Ireland and Norway, France and Finland, Germany and the UK. In IGOV exchange-traded fund:
- average daily trading volume - 142,000 units of assets;
- assets worth $ 1.1 billion are under management;
- profitability - 10%;
- profitability as of the current year (YTD) - 9.42%.
2.iShares 1-3 Year International Treasury Bond ETF (ISHG)
The iShares 1-3 Year International Treasury Bond ETF (ISHG) tracks the S & P / Citigroup Ex-US 1-3 Year International Treasury Index. The ETF invests in developed country treasury bonds (excluding the US) with maturities ranging from one to three years.
Its investment portfolio includes government bonds of Japan, France, Italy, Germany, Belgium, Canada and Australia. In the ISHG exchange-traded fund:
- average daily volume of 4.934 units;
- assets for $ 59 million are under management;
- profitability - 30%;
- profitability as of the current year (YTD) - 6.13%.
3. SPDR Bloomberg Barclays Short Term International Treasury Bond ETF (BWZ)
The SPDR Bloomberg Barclays Short Term International Treasury Bond ETF (BWZ) tracks the Bloomberg Barclays 1-3 Year Global Treasury Ex-US Capped Index.
The Exchange Traded Fund specializes in debt securities with maturities ranging from one to three years. Funds in this fund are denominated in local currency. BWZ has access to the bonds and markets of South Korea, China, Japan, France and Australia. In the BWZ Foundation:
- assets for $ 250 million are under management;
- profitability - 11%;
- profitability as of the current year (YTD) - 4.50%.
4.SPDR Bloomberg Barclays International Treasury Bond ETF (BWX)
SPDR Bloomberg Barclays International Treasury Bond ETF (BWX) has significant European exposure and invests in emerging markets.
BWX tracks Bloomberg Barclays Global Treasury Ex-US Capped Index. It is important to note that all of the fund's investments are denominated in local currencies. ETFs have an impact on the markets of China, South Korea, Indonesia, Denmark and Belgium. In the BWX Foundation:
- average daily volume: 40,982 units of assets;
- assets worth $ 1 billion are under management;
- profitability - 46%;
- profitability as of the current year (YTD) - 7.43%.