Question
I am interested in investing in European sovereign bonds as a safe haven which also provides a hedge against sterling. Interest rates seem likely to rise,however and there may be some danger of capital depreciation.
What do you think the mid to longer term prospects are for this kind of investment? And is it advisable to purchase direct or via a unit trust?Answer
European sovereign bonds are IOUs issued by European governments, essentially the same as gilts here in the UK.
As with gilts, the two biggest risks (other than the government going bust) are rising interest rates and inflation, both of which reduce the appeal of the bonds hence their price. As a UK investor currency is also a risk (because you have to purchase the bonds in euros), although as you point out if the pound weakens against the euro this would be to your advantage (because you’d get more pounds per euro when you sell).
The European Central Bank (ECB) has held its base interest rate at 1% since May 2009 because, like the Bank of England, it’s under pressure to keep rates low to combat the impact of the credit crunch.
The ECB is bound to raise interest rates at some point, the question is when? On the one hand eurozone economic health is generally a little better than the UK, so there’s less pressure on the ECB to keep rates pinned at current levels. But European inflation is lower than the UK too (0.9% over 2009 vs 2.9% in the UK), which means less pressure to raise rates. I’d take a guess than the ECB base rate will stay more or less where it is for at least another year.
Nevertheless, I wouldn’t be rushing to buy either European sovereign bonds or gilts at present. Even if interest rates remain low for the time being, medium to longer term they’ll inevitably rise. The same goes for inflation, which has already started to rise of late.
But if you do want to invest, I share your view that European sovereign bonds look more appealing than gilts, especially if you believe the pound will weaken versus the euro. The yields are broadly comparable and the potential threats to bond prices appear to be lower in Europe.
A simple and cost effective way to get exposure would be via exchange traded funds (ETFs). For example, iShares has a number of ETFs listed on the London Stock Exchange that track European sovereign bonds (they mainly vary re: redemption dates of underlying bonds). Annual costs are around 0.2%, which is far lower than you’d pay on a unit trust.
You can buy ETFs through online stockbrokers, expect to pay dealing costs of about £10 to buy and sell. There’s no stamp duty.
I am interested in investing in European sovereign bonds as a safe haven which also provides a hedge against sterling. Interest rates seem likely to rise,however and there may be some danger of capital depreciation.
What do you think the mid to longer term prospects are for this kind of investment? And is it advisable to purchase direct or via a unit trust?Answer
European sovereign bonds are IOUs issued by European governments, essentially the same as gilts here in the UK.
As with gilts, the two biggest risks (other than the government going bust) are rising interest rates and inflation, both of which reduce the appeal of the bonds hence their price. As a UK investor currency is also a risk (because you have to purchase the bonds in euros), although as you point out if the pound weakens against the euro this would be to your advantage (because you’d get more pounds per euro when you sell).
The European Central Bank (ECB) has held its base interest rate at 1% since May 2009 because, like the Bank of England, it’s under pressure to keep rates low to combat the impact of the credit crunch.
The ECB is bound to raise interest rates at some point, the question is when? On the one hand eurozone economic health is generally a little better than the UK, so there’s less pressure on the ECB to keep rates pinned at current levels. But European inflation is lower than the UK too (0.9% over 2009 vs 2.9% in the UK), which means less pressure to raise rates. I’d take a guess than the ECB base rate will stay more or less where it is for at least another year.
Nevertheless, I wouldn’t be rushing to buy either European sovereign bonds or gilts at present. Even if interest rates remain low for the time being, medium to longer term they’ll inevitably rise. The same goes for inflation, which has already started to rise of late.
But if you do want to invest, I share your view that European sovereign bonds look more appealing than gilts, especially if you believe the pound will weaken versus the euro. The yields are broadly comparable and the potential threats to bond prices appear to be lower in Europe.
A simple and cost effective way to get exposure would be via exchange traded funds (ETFs). For example, iShares has a number of ETFs listed on the London Stock Exchange that track European sovereign bonds (they mainly vary re: redemption dates of underlying bonds). Annual costs are around 0.2%, which is far lower than you’d pay on a unit trust.
You can buy ETFs through online stockbrokers, expect to pay dealing costs of about £10 to buy and sell. There’s no stamp duty.
Read this Q and A at http://www.candidmoney.com/questions/question119.aspx
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