Buying europe bonds now, like munis in 2008?

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idoc2020
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Buying europe bonds now, like munis in 2008?

Post by idoc2020 »

In 2008 I made the very good decision to place a large part of my portfolio into Calif munis. I bought the bonds directly at 5% and will be holding them until 2016. I also bought a big chunk of a muni bond fund. At the time there was a lot of hand wringing and worrying about whether or not states would go bankrupt. I did not think it likely that California would go bankrupt and invested as much as I could. Now that interest rates are down to 2% or less I'm very glad that I bought these bonds. The corollary to this question is if there's a similar opportunity in Europe? Italian bonds are now paying 7.5% because of widespread fear of default. Other countries (apart from Germany) have similarly high rates. If you feel confident that these countries will not default wouldn't this be a good investment? What is the best way to capitalize on this? I feel that it is extremely unlikely that Italy or Spain would default on their obligations and am willing to take that risk.
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CaliJim
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Re: Buying europe bonds now, like munis in 2008?

Post by CaliJim »

You are asking us to speculate about speculation. There are more investors here than speculators. IMHO - it is too risky to put retirement money into euro-bonds.
Valuethinker
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Re: Buying europe bonds now, like munis in 2008?

Post by Valuethinker »

ilan1h wrote:In 2008 I made the very good decision to place a large part of my portfolio into Calif munis. I bought the bonds directly at 5% and will be holding them until 2016. I also bought a big chunk of a muni bond fund. At the time there was a lot of hand wringing and worrying about whether or not states would go bankrupt. I did not think it likely that California would go bankrupt and invested as much as I could. Now that interest rates are down to 2% or less I'm very glad that I bought these bonds. The corollary to this question is if there's a similar opportunity in Europe? Italian bonds are now paying 7.5% because of widespread fear of default. Other countries (apart from Germany) have similarly high rates. If you feel confident that these countries will not default wouldn't this be a good invest
ment? What is the best way to capitalize on this? I feel that it is extremely unlikely that Italy or Spain would default on their obligations and am willing to take that risk.
Ian

First thought is what would their stock markets do and european financials generally if it becomes clear there is nor risk of default? Outperform bonds? I thnk so.

2. Second thought is about the causes of default. If ca were to default it would be the worlds sixth largest economy doing so because its legislature could not agree to cut spending and raise taxes.

If italy or spain defaults they have already imposed far tougher tax and spending measures than anything contemplated in ca and ca is a richer country in terms of gdp than either.

It would be more as if ca defaulted because the fed refused to. Bail out b of a and wells fargo when they got in trouble by a housing smash.

So beware reasoning by false analogy. A us state is not a european country and the eu is not a country like canada or usa or uk.
madbrain
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Re: Buying europe bonds now, like munis in 2008?

Post by madbrain »

Unlike California's bonds, these bonds are denominated in euros, not dollars. So, in addition to these countries' default risk, you have to consider the currency risk.
grok87
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Re: Buying europe bonds now, like munis in 2008?

Post by grok87 »

Valuethinker wrote: If italy or spain defaults they have already imposed far tougher tax and spending measures than anything contemplated in ca and ca is a richer country in terms of gdp than either.
Looks like Christmas has come early for me this year. Valuethinker is one of the smartest posters I know, on this or any forum. But I think I finally get to correct one of his factoids.
;-)

As per Wikipedia,
http://en.wikipedia.org/wiki/Economy_of_California
California has Gross State product (2010 ) of $1.9 Trillion and if it were an independent country would be the 8th largest economy in the world.

As per Wikipedia,
http://en.wikipedia.org/wiki/List_of_co ... _(nominal)
Italy has Gross Domestic product (2010) of $2.1 Trillion and is currently the 8th largest economy in the world.

So I think Italy and California have similarly sized economies.
cheers,
RIP Mr. Bogle.
ilmartello
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Re: Buying europe bonds now, like munis in 2008?

Post by ilmartello »

European bonds i.e. Greece have already faced write downs
Valuethinker
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Re: Buying europe bonds now, like munis in 2008?

Post by Valuethinker »

grok87 wrote:
Valuethinker wrote: If italy or spain defaults they have already imposed far tougher tax and spending measures than anything contemplated in ca and ca is a richer country in terms of gdp than either.
Looks like Christmas has come early for me this year. Valuethinker is one of the smartest posters I know, on this or any forum. But I think I finally get to correct one of his factoids.
;-)

As per Wikipedia,
http://en.wikipedia.org/wiki/Economy_of_California
California has Gross State product (2010 ) of $1.9 Trillion and if it were an independent country would be the 8th largest economy in the world.

As per Wikipedia,

http://en.wikipedia.org/wiki/List_of_co ... _(nominal)
Italy has Gross Domestic product (2010) of $2.1 Trillion and is currently the 8th largest economy in the world.

So I think Italy and California have similarly sized economies.
cheers,
Touche ;-). You are one of the brightest guys around here don't fall for any hype 'bout moi.

What occurs:

_
- should have googled ca but really its impossible to imagine a richer pace in the world ex sinapore or bavaria perhaps. Just the actual cost of property but conversely the average level of everything.

I doubt italy is really as rich as california.

That said estimates of the underground 'black' econo y in italy are 20 percent og gdp so on that basis italy is richer than california. I realize the central valley is very different from burbank san diego or bay area and oakland from russian hill, but I think if you wander around mentally the two places its clear that despite 1000 years of fantastic old buildings ca is just a lot richer than italy. Not as charming but richer.

'I'll surpasso' celebrates the moment when italy passed uk in gdp but after 10 years of deflation under the euro italy is just depressed and crushed. More like michigan than california. Which is no slight on the good people of michigan and the extraordinary high tech they deploy be it chevy volt or the world's largest concentration artificial joint makers.
kraftwerk
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Re: Buying europe bonds now, like munis in 2008?

Post by kraftwerk »

Greece has to redeem 1.2 billion euro of bonds on the 19th, except they don't really have the means to do so. And another 1 billion on the 22nd, and 5.2billion on the 29th. It will be interesting to see what happens on the 19th and what happens with its neighbours.

http://www.youtube.com/watch?v=5V3kpKzd ... age#t=713s
grok87
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Re: Buying europe bonds now, like munis in 2008?

Post by grok87 »

Valuethinker wrote:
I doubt italy is really as rich as california.

That said estimates of the underground 'black' econo y in italy are 20 percent og gdp so on that basis italy is richer than california. I realize the central valley is very different from burbank san diego or bay area and oakland from russian hill, but I think if you wander around mentally the two places its clear that despite 1000 years of fantastic old buildings ca is just a lot richer than italy. Not as charming but richer.

'I'll surpasso' celebrates the moment when italy passed uk in gdp but after 10 years of deflation under the euro italy is just depressed and crushed. More like michigan than california. Which is no slight on the good people of michigan and the extraordinary high tech they deploy be it chevy volt or the world's largest concentration artificial joint makers.
Yeah international comparisons are tricky aren't they, especially when the currencies are different. I remember back when the euro came out and it was worth less than the dollar for quite a while- so the GDP comparison would have looked a lot different back then.
Also to your point, Italy is a lot less productive/efficient than California. They have similar GDPs but California has 37 M people while Italy has 61 M. So on that basis Californians would be around 60% more productive.
Bringing it back to the investment world, I don't think either country is going to default. i.e. neither one is Greece. They are both wealthy, large productive economies. IMHO their problems are "liquidity" problems, not "solvency" problems.
cheers,
RIP Mr. Bogle.
Valuethinker
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Re: Buying europe bonds now, like munis in 2008?

Post by Valuethinker »

ilan

If you believe your thesis then you should buy the Italian and Spanish 10 year government bonds. Presumably a broker will sell those to you?

Alternatively there may be a closed end bond fund with the right holdings?

This is rank speculation. You may well be right (the Eurozone will ride to the rescue) but it is speculation.

Vt
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baw703916
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Re: Buying europe bonds now, like munis in 2008?

Post by baw703916 »

Regarding the currency risk aspect of Euro-denominated bonds, I think this is an important distinction with regard to U.S. munis.

The Euro has actually appreciated (slightly) against the USD since the debt crisis first popped up in May 2010. Which is kind of odd for a currency whose demise is the subject of daily speculation. I'm sure that Valuethinker can give a much better explanation of the different forces determining the exchange rate, but I think that the ECB's rather tight monetary policy (relative to the Fed) has something to do with it.

One likely scenario in a Euro rescue would be for the ECB to drop interest rates (if they could convince certain member states to get over their tight money fetish) which would increase liquidity, spur economic growth, and allow some countries (particularly Italy and Spain) to inflate away some of their debt. But that would almost certainly cause a significant drop in the Euro/Dollar exchange rate. So for a USD based investor, they get paid in Euros as promised, but it doesn't translate into as many Dollars as they might have hoped.

Brad
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Topic Author
idoc2020
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Re: Buying europe bonds now, like munis in 2008?

Post by idoc2020 »

One thing that is not commonly mentioned is that the Eurozone experiment is not completely new. About 150 years ago the Austrian=Hungarian empire established a common currency within its sphere of 8-12 participating countries. This worked very well for 40 years until the end of WWI when the empire collapsed for various reasons. The interesting part is what happened to the common currency once this collapse took place: it was utter mayhem which lasted for decades. As each country tried to devolve off the common currency and back into its previous ones there were insane flights of currency back towards those countries that still retained the common currency. These movements of currencies whipsawed back and forth so extensively that some countries literally closed their borders to avoid the exit of currency. Industry and commerce ground to a halt as people no longer understood the worth of their currency. At the same time Germany began to experience crippling hyperinflation (a billion percent!!) due to expensive war reparations and other issues. This period of uncertain currency conditions and hyperinflation is etched into Europe's national consciousness, particularly Germany. After this period only one other country of any significant size defaulted on its debt and that was Argentina (leading to decades of pain, stagnation and villification of its bond markets). Americans tend to be quite nonchalante about debt default and bankruptcy and in some cases it is even admired. This is not the case in Europe and I firmly believe that devolution of the common currency or debt default by one of the giant nations is simply as unthinkable to them as California or New York defaulting is to us.
nycll
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How can countries exit the common currency

Post by nycll »

If a weak country like Greece exits, it will wipe clean the money it owned but can't pay back. Its banks will be wiped out but the productive sectors of the economy will thrive under a competitive drachma. And the average standard of living will collapse but we already know the country have been living beyond its means. But the exit of the weakest link will be devastating to the second and third weakest in the union. Literally bank runs will ensue because people don't want saving in currencies which can be devalued overnight.

However, if the strongest country, for example Germany, exits, the remaining countries will be more homogeneous and their collective financial strength will be big enough to support the remaining Euro. This is probably a lest destabilizing route to disintegrate the Euro.
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idoc2020
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Re: How can countries exit the common currency

Post by idoc2020 »

nycll wrote:However, if the strongest country, for example Germany, exits, the remaining countries will be more homogeneous and their collective financial strength will be big enough to support the remaining Euro. This is probably a lest destabilizing route to disintegrate the Euro.

Actually, a hybrid system has been proposed whereby there would be two eurozones: one would be dominated by Germany and France, and the other would include weaker economies. The advantage is that inflation, interest and currency rates would be more custom-tailored to those countries. It is apparent right now that it is unrealistic to have low German- syle interest rates in countries such as Greece and Portugal.
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CaliJim
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Re: Buying europe bonds now, like munis in 2008?

Post by CaliJim »

Option C: if you plan to visit Italy in 5 or 10 years - buy the 5 or 10 year Italian bond in an amount equal to what you plan on spending while you are there.
PreserveCapital
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Re: Buying europe bonds now, like munis in 2008?

Post by PreserveCapital »

Italian bonds are now paying 7.5% because of widespread fear of default. Other countries (apart from Germany) have similarly high rates. If you feel confident that these countries will not default wouldn't this be a good investment?
No, because your personal feeling of confidence that default won't occur != a viable investment thesis.

You may also be subject to some cognitive bias based on your success with the California muni purchase in 2008.

Just because things turned out OK with the Cali bond purchase doesn't mean your decision-making process at the decision point--not now, after the fact, when the results are known--was optimal, nor even if it was optimal at that time, under those circumstances, would be optimal w/r/t the Italian bond idea.
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Taylor Larimore
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Bonds for speculation ?

Post by Taylor Larimore »

Hi Ilan:
I feel that it is extremely unlikely that Italy or Spain would default on their obligations and am willing to take that risk.
In my opinion, bonds are for safety--not speculation. If you want to speculate with the significant risk of being wrong, buy stocks where the return for a correct guess is much greater.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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baw703916
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Re: Buying europe bonds now, like munis in 2008?

Post by baw703916 »

There is, in fact a Powershares ETN which invests invests in Italian bonds.

http://www.powersharesetns.com/portal/s ... ixedincome

And, there's a 3x leveraged version. :shock:

I actually might be willing to put a small amount of "mad money into bonds from Italy/Spain. If either or both does default, things will get quite bad everywhere, and you won't be very well protected just because you didn't own their bonds.

But, these products are badly flawed.

ETN means you are putting faith not only in the credit worthiness of the Italian government, but also of the ETN sponsor.

I hate leveraged funds with a passion.
Most of my posts assume no behavioral errors.
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