German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
bagle
Posts: 45
Joined: Tue Feb 22, 2011 5:59 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by bagle » Tue May 29, 2018 8:55 am

The Eurozone lacks a zone-wide bank bailout mechanism. That is its key structural flaw.
The Eurozone did establish the European Stability Mechanism (ESM) in 2013 to bailout (or more politely, provide financial support) for up to 500 billion Euros. Of course, any bailout would be subject to accepting a Memorandum of Understanding (MoU) whose terms would be anathma to any anti-system political party.

CnC
Posts: 526
Joined: Thu May 11, 2017 12:41 pm

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by CnC » Tue May 29, 2018 8:56 am

Are us treasury bonds not available in Europe?

I never understood why people would buy 0 or negative yield bonds when there were equally safe bonds for sale in the us with 10x the yield.

User avatar
market timer
Posts: 5898
Joined: Tue Aug 21, 2007 1:42 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by market timer » Tue May 29, 2018 9:22 am

CnC wrote:
Tue May 29, 2018 8:56 am
Are us treasury bonds not available in Europe?

I never understood why people would buy 0 or negative yield bonds when there were equally safe bonds for sale in the us with 10x the yield.
Because shopkeepers in Europe don't price things in dollars.

bberris
Posts: 1007
Joined: Sun Feb 20, 2011 9:44 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by bberris » Tue May 29, 2018 9:41 am

Valuethinker wrote:
Mon May 28, 2018 8:05 am
dumbmoney wrote:
Mon May 28, 2018 7:56 am
Valuethinker wrote:
Sun May 27, 2018 5:59 am
dumbmoney wrote:
Sun May 27, 2018 5:32 am
A currency union is very different than a currency peg. The concept of devaluation doesn't really apply. It would take many years to leave the euro in an orderly, sane way - just as it took many years to enter it.
Entry and exit are not symmetrical problems in any way.
In both cases, you're transitioning from an established currency to a new one. Seems pretty similar to me. You start with a credible peg and ease your way into the new currency. It would be madness to try to do it quickly.
The problem is the divergence trade becomes a no-lose bet -- the New Lira is going to devalue against the EUR (or there's no point in doing this from the Italian government viewpoint). Thus, the market will move you to where you want to go in a very short period of time.

At the same time, everyone who is at risk of being forced into the new currency will scramble to buy the Euro. We saw this in Greece, already, there was a bank run. So they limited withdrawals to 60 EUR a day (then they revised that to 420 a week ;-)). People were flocking to buy consumer durable goods, anything to get their money out of Greek banks (I think there were also suspensions on VISA credit cards etc, not sure on that).

The Italian banking system would be at risk of implosion. It would become self fulfilling when the Bank of Italy hurriedly printed New Lira to fill the bank machines.

So no, this is not symmetrical. "T'were done, t'were it were done quickly".
If Italy left the Euro currency, I doubt it would be forced. In fact, you outlined the process in an earlier post (govt taxes and expenditure in New Lira). One significant thing you left out: Italy would no longer be able to offer credible deposit insurance on Euro accounts. Might support the New Lira.

User avatar
Lauretta
Posts: 656
Joined: Wed Jul 05, 2017 6:27 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Tue May 29, 2018 9:45 am

xxd091 wrote:
Sun May 27, 2018 6:41 pm
Hi
UK Boglehead here-been in the Italian position-sort of-Brexit seems to be happening!
Not the same as leaving the Euro but a serious financial move nevertheless .
Am also a Scot-independence nearly succeeded!-could have had to leave the pound.
Where to invest as all the “fixed” points start to move -how to preserve my capital and grew it
My take was to invest in a Vanguard Global Equity Index Fund plus Vanguard Global Bond Index Fund (Hedged to the Pound-my current local currency)
(Is this type of Bond fund available to Italians?)
This gave me a large exposure to US -currently the most stable and successfull economy-seems to have worked over the last 9 years for me
xxd09
Hi, yes I have a globally diversified stock portfolio; for the bonds I haven't done that because after the cost of currency hedging the returns would be very low or negative (it costs about 3%/yr now to hedge assets labelled in USD to the Euro). Also, if the eurozone were to disappear, the euro hedged funds would cease to exist too. Don't know how it wold work out in practice.
But getting a global currency hedged bond portfolio does make sense except for these 2 problems...
When everyone is thinking the same, no one is thinking at all

CnC
Posts: 526
Joined: Thu May 11, 2017 12:41 pm

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by CnC » Tue May 29, 2018 10:13 am

market timer wrote:
Tue May 29, 2018 9:22 am
CnC wrote:
Tue May 29, 2018 8:56 am
Are us treasury bonds not available in Europe?

I never understood why people would buy 0 or negative yield bonds when there were equally safe bonds for sale in the us with 10x the yield.
Because shopkeepers in Europe don't price things in dollars.
Why does that matter? I didn't say why don't they just carry dollars. I asked why don't they invest in us treasury bonds.

Convert euros it dollars buy bonds with dollars.
Later
Sell bonds for dollars convert it to euros.

Sure there is a little currency risk, but you will be getting 3% vs 0% yield. That 3% per year will offset the currency risk, on top of that if the economic downturn that the op is afraid of happens then the US dollars he sells his bonds for will be worth that much more.

CnC
Posts: 526
Joined: Thu May 11, 2017 12:41 pm

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by CnC » Tue May 29, 2018 10:16 am

Lauretta wrote:
Tue May 29, 2018 9:45 am
xxd091 wrote:
Sun May 27, 2018 6:41 pm
Hi
UK Boglehead here-been in the Italian position-sort of-Brexit seems to be happening!
Not the same as leaving the Euro but a serious financial move nevertheless .
Am also a Scot-independence nearly succeeded!-could have had to leave the pound.
Where to invest as all the “fixed” points start to move -how to preserve my capital and grew it
My take was to invest in a Vanguard Global Equity Index Fund plus Vanguard Global Bond Index Fund (Hedged to the Pound-my current local currency)
(Is this type of Bond fund available to Italians?)
This gave me a large exposure to US -currently the most stable and successfull economy-seems to have worked over the last 9 years for me
xxd09
Hi, yes I have a globally diversified stock portfolio; for the bonds I haven't done that because after the cost of currency hedging the returns would be very low or negative (it costs about 3%/yr now to hedge assets labelled in USD to the Euro). Also, if the eurozone were to disappear, the euro hedged funds would cease to exist too. Don't know how it wold work out in practice.
But getting a global currency hedged bond portfolio does make sense except for these 2 problems...
Could you explain "cost of currency hedging" I'm American so I haven't ran into this issue before.

User avatar
market timer
Posts: 5898
Joined: Tue Aug 21, 2007 1:42 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by market timer » Tue May 29, 2018 10:22 am

CnC wrote:
Tue May 29, 2018 10:16 am
Could you explain "cost of currency hedging" I'm American so I haven't ran into this issue before.
The term is interest rate parity: https://en.m.wikipedia.org/wiki/Interest_rate_parity

User avatar
Lauretta
Posts: 656
Joined: Wed Jul 05, 2017 6:27 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Tue May 29, 2018 10:33 am

nedsaid wrote:
Sun May 27, 2018 3:30 pm
My take is that markets can do unexpected things. If you think German Bonds are a riskless bet with potentially big upside for Italian investors, chances are that others are noticing that too, particularly the very large institutions. My guess is that this is all built into the price of German Bonds, perhaps German Bonds are overbought here. You could have the dream scenario unfold where these bonds would be hugely profitable only to see the price fall. Markets are like that. Invest in good investments, don't overdo the scenario game. Italy may or may not leave the European Union, even if it does, markets are not obligated to react in the way you think they will. Be careful.
Well I am not claiming that I am the first to notice this; many Italians with savings are considering taking money out of the country as there's the risk our accounts may be frozen and invetsment in foreign assets be prohibited if Italy decides to exit the eurozone.
I don't know whether big institutions are allowed to take all their money abroad; anyway the assumptions of EMH (and the question 'what do you know that the markets don't?' etc) are not really applicable because it's a question of a State which might choose freeze your assets and devaluate the local currency.
When everyone is thinking the same, no one is thinking at all

User avatar
Lauretta
Posts: 656
Joined: Wed Jul 05, 2017 6:27 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Tue May 29, 2018 10:38 am

nisiprius wrote:
Sun May 27, 2018 4:01 pm
nedsaid wrote:
Sun May 27, 2018 3:30 pm
My take is that markets can do unexpected things. If you think German Bonds are a riskless bet with potentially big upside for Italian investors, chances are that others are noticing that too, particularly the very large institutions. My guess is that this is all built into the price of German Bonds, perhaps German Bonds are overbought here. You could have the dream scenario unfold where these bonds would be hugely profitable only to see the price fall. Markets are like that. Invest in good investments, don't overdo the scenario game. Italy may or may not leave the European Union, even if it does, markets are not obligated to react in the way you think they will. Be careful.
Hear, hear.

I was going to phrase it this way: what are the odds of my finding a virtually riskless bet with no downside and a big upside, versus the odds that I've made a mistake and am overlooking some important source of risk?

About ten years ago there were quite a few cases of people who thought they have found various "virtually riskless" investments: the GE Enhanced Cash mutual fund, the Schwab YieldPlus fund, auction rate securities. I remember the treasurer of a small town suing UBS for having misrepresented auction rate securities to him as being cash equivalents. UBS claimed that they had done no such thing. The treasurer showed the press his UBS statement in which these completely illiquid securities were listed under "cash."
You comparison makes zero sense to me. Can you explain in what way opening a deposit account in a German bank, or (if I were unable to do that because of restrictions to non-residents) purchasing short term German Government bonds (which is what I refer to in my OP), is comparable to the illiquid securities you mention?
When everyone is thinking the same, no one is thinking at all

User avatar
alpine_boglehead
Posts: 206
Joined: Fri Feb 17, 2017 9:51 am
Location: Austria

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by alpine_boglehead » Tue May 29, 2018 11:17 am

Hi Lauretta,

I'm also a bit skeptical about the Eurozone's long-term stability. So many moving parts but only one currency is going to create lots of shear force.

Being from Austria, this also would directly affect me.
I take it this way: having a stock-heavy globally diversified portfolio gives me lots of non-Euro holdings. For Euro-denominated bonds I currently prefer CDs. In addition to that I like to keep a smaller part of the bond portion of the portfolio in unhedged high-quality global bonds, in order to not have all my currency holdings in Euro. Just in case.

Stock markets would likely be quite tumultuous in case of a Euro breakup, but I guess that would be a short-term effect until the dust settles.
Regarding the CDs, I'd perhaps stick to the maximum of 20k per bank which was the insurance limit before the banking crisis, I don't think in rough times the current 100k insurance limit would hold.

User avatar
Lauretta
Posts: 656
Joined: Wed Jul 05, 2017 6:27 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Tue May 29, 2018 12:39 pm

alpine_boglehead wrote:
Tue May 29, 2018 11:17 am
Hi Lauretta,

I'm also a bit skeptical about the Eurozone's long-term stability. So many moving parts but only one currency is going to create lots of shear force.

Being from Austria, this also would directly affect me.
I take it this way: having a stock-heavy globally diversified portfolio gives me lots of non-Euro holdings. For Euro-denominated bonds I currently prefer CDs. In addition to that I like to keep a smaller part of the bond portion of the portfolio in unhedged high-quality global bonds, in order to not have all my currency holdings in Euro. Just in case.

Stock markets would likely be quite tumultuous in case of a Euro breakup, but I guess that would be a short-term effect until the dust settles.
Regarding the CDs, I'd perhaps stick to the maximum of 20k per bank which was the insurance limit before the banking crisis, I don't think in rough times the current 100k insurance limit would hold.
Hi alpine_boglehead, I'm from Friuli, on the other side of the border :happy
What you say makes total sense to me, including the idea of keeping
a smaller part of the bond portion of the portfolio in unhedged high-quality global bonds
, something I have been seriously considering lately, as we are not in the same situation as US investors.
When everyone is thinking the same, no one is thinking at all

User avatar
alpine_boglehead
Posts: 206
Joined: Fri Feb 17, 2017 9:51 am
Location: Austria

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by alpine_boglehead » Tue May 29, 2018 1:59 pm

Lauretta wrote:
Tue May 29, 2018 12:39 pm

Hi alpine_boglehead, I'm from Friuli, on the other side of the border :happy
What you say makes total sense to me, including the idea of keeping
a smaller part of the bond portion of the portfolio in unhedged high-quality global bonds
, something I have been seriously considering lately, as we are not in the same situation as US investors.
Buonasera to the north of the sunny south :)

Yep, I think the only way to reduce the risk is to diversify, even if that means taking on some currency fluctuation risk. In my view, having all your bonds in one currency puts all your presumably non-risky portfolio part at the mercy of development of that single currency. As you say, US investors are in a better situation in this case (or so it seems).

The only (minor) downside is that we individual investors are, as often, a bit late to the party. The recent depreciation of the Euro against the dollar shows that other investors already had the same feeling - moving from Euro to other currencies. But if you think that in the long term it makes sense for you (i.e. helps you sleep better) to hold some non-Euro bonds ... like with stocks ... don't try to time the market, develop a plan and follow it.

TM90
Posts: 95
Joined: Mon Mar 06, 2017 2:13 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by TM90 » Tue May 29, 2018 2:33 pm

Laurette, I'm from Belgium. I sold my shares in the iShares etf IEGA yesterday and couldn't be happier I bought a global bond etf Hedged to euro. I suggest you do the same or open up am account with your broker to buy dollars or us treasuries Hedged to euro.

User avatar
Lauretta
Posts: 656
Joined: Wed Jul 05, 2017 6:27 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Tue May 29, 2018 3:01 pm

TM90 wrote:
Tue May 29, 2018 2:33 pm
Laurette, I'm from Belgium. I sold my shares in the iShares etf IEGA yesterday and couldn't be happier I bought a global bond etf Hedged to euro. I suggest you do the same or open up am account with your broker to buy dollars or us treasuries Hedged to euro.
Yes, there are a couple of global bond ETFs hedged to euro I can have access to (from iShares and Xtrackers, though the former has a lower TER of 0,1%). It's a bit of a shame though that hedging to the USD costs around 3%/yr now.

I'm also thinking of investing some money in a global bond fund unhedged to euro, as I mentioned above.
When everyone is thinking the same, no one is thinking at all

User avatar
BeBH65
Posts: 1105
Joined: Sat Jul 04, 2015 7:28 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by BeBH65 » Tue May 29, 2018 3:22 pm

CnC wrote:
Tue May 29, 2018 10:13 am
market timer wrote:
Tue May 29, 2018 9:22 am
CnC wrote:
Tue May 29, 2018 8:56 am
Are us treasury bonds not available in Europe?

I never understood why people would buy 0 or negative yield bonds when there were equally safe bonds for sale in the us with 10x the yield.
Because shopkeepers in Europe don't price things in dollars.
Why does that matter? I didn't say why don't they just carry dollars. I asked why don't they invest in us treasury bonds.

Convert euros it dollars buy bonds with dollars.
Later
Sell bonds for dollars convert it to euros.

Sure there is a little currency risk, but you will be getting 3% vs 0% yield. That 3% per year will offset the currency risk, on top of that if the economic downturn that the op is afraid of happens then the US dollars he sells his bonds for will be worth that much more.
Please have a look at a graph of the usd-to-eur conversion rate.
Two not random chosen points: dec 2016 - 0,95 euro for every usd, one year later dec 2017 - 0,80 euro for every usd.
An investor from europe would have lost a lot if he would have held US treasury over that period.
Not the stability that we want that bonds bring to our portfolio.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

User avatar
Lauretta
Posts: 656
Joined: Wed Jul 05, 2017 6:27 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Tue May 29, 2018 3:47 pm

CnC wrote:
Tue May 29, 2018 10:13 am
market timer wrote:
Tue May 29, 2018 9:22 am
CnC wrote:
Tue May 29, 2018 8:56 am
Are us treasury bonds not available in Europe?

I never understood why people would buy 0 or negative yield bonds when there were equally safe bonds for sale in the us with 10x the yield.
Because shopkeepers in Europe don't price things in dollars.
Why does that matter? I didn't say why don't they just carry dollars. I asked why don't they invest in us treasury bonds.

Convert euros it dollars buy bonds with dollars.
Later
Sell bonds for dollars convert it to euros.

Sure there is a little currency risk, but you will be getting 3% vs 0% yield. That 3% per year will offset the currency risk, on top of that if the economic downturn that the op is afraid of happens then the US dollars he sells his bonds for will be worth that much more.
Yes, I think market timer expressed with humour the fact that you incur currency risk by holding bonds labelled in another currency. It's not a question of holding euros or dollars in your pockets, it's the fact that dollars migh be worth less in a year's time in euros terms than now, and I will be spending euros (unless I come on holiday to the US 8-) ) Usually one is adviced to hold bonds in one's own currency because they are supposed to be the stable part of your portfolio.
But since the situation in the Eurozone is a mess, it might indeed be worth to have a small allocation to a global bonds fund.
When everyone is thinking the same, no one is thinking at all

xxd091
Posts: 33
Joined: Sun Aug 21, 2011 4:41 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by xxd091 » Tue May 29, 2018 5:23 pm

Very impressed how the European and American Bogleheads are helping each other
Surely this is the way ahead for this forum as the Boglehead philosophy starts to expand from its inception in America to Europe and the rest of the world
I have been through 2001,2008 crashes with help from posts from here even though I am UK based -good advice is universal
Now we look like entering the maelstrom once again
Help from Bogleheads will get us through it again I’m sure
Our thoughts must be with the Italians at this time
xxd091

Valuethinker
Posts: 35015
Joined: Fri May 11, 2007 11:07 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Valuethinker » Wed May 30, 2018 7:55 am

Lauretta wrote:
Tue May 29, 2018 10:33 am
nedsaid wrote:
Sun May 27, 2018 3:30 pm
My take is that markets can do unexpected things. If you think German Bonds are a riskless bet with potentially big upside for Italian investors, chances are that others are noticing that too, particularly the very large institutions. My guess is that this is all built into the price of German Bonds, perhaps German Bonds are overbought here. You could have the dream scenario unfold where these bonds would be hugely profitable only to see the price fall. Markets are like that. Invest in good investments, don't overdo the scenario game. Italy may or may not leave the European Union, even if it does, markets are not obligated to react in the way you think they will. Be careful.
Well I am not claiming that I am the first to notice this; many Italians with savings are considering taking money out of the country as there's the risk our accounts may be frozen and invetsment in foreign assets be prohibited if Italy decides to exit the eurozone.
I don't know whether big institutions are allowed to take all their money abroad; anyway the assumptions of EMH (and the question 'what do you know that the markets don't?' etc) are not really applicable because it's a question of a State which might choose freeze your assets and devaluate the local currency.
Before you have a "bank run" you have a "bank walk".

When people are queuing up in the streets to withdraw deposits, the bank walk will have become the bank run. We saw this in Greece.

Valuethinker
Posts: 35015
Joined: Fri May 11, 2007 11:07 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Valuethinker » Wed May 30, 2018 7:58 am

CnC wrote:
Tue May 29, 2018 10:13 am
market timer wrote:
Tue May 29, 2018 9:22 am
CnC wrote:
Tue May 29, 2018 8:56 am
Are us treasury bonds not available in Europe?

I never understood why people would buy 0 or negative yield bonds when there were equally safe bonds for sale in the us with 10x the yield.
Because shopkeepers in Europe don't price things in dollars.
Why does that matter? I didn't say why don't they just carry dollars. I asked why don't they invest in us treasury bonds.

Convert euros it dollars buy bonds with dollars.
Later
Sell bonds for dollars convert it to euros.

Sure there is a little currency risk, but you will be getting 3% vs 0% yield. That 3% per year will offset the currency risk, on top of that if the economic downturn that the op is afraid of happens then the US dollars he sells his bonds for will be worth that much more.
The currency risk is not "little".Even on the most liquid trades in the world USD: EUR, USD: GBP, USD: JPY you can have 20% exchange rate moves in a year.

You can have 10% in about 60 minutes when there is event risk: the market expected that the UK's Brexit vote was defeated, instead the vote was for Brexit. Thus, a 10% move in GBP against USD & EUR between roughly 2 am and 3 am.

GBP also fell 20% against the DM in 1 day on Black Wednesday, when "George Soros broke the Bank of England".

Valuethinker
Posts: 35015
Joined: Fri May 11, 2007 11:07 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Valuethinker » Wed May 30, 2018 8:01 am

xxd091 wrote:
Tue May 29, 2018 5:23 pm
Very impressed how the European and American Bogleheads are helping each other
Surely this is the way ahead for this forum as the Boglehead philosophy starts to expand from its inception in America to Europe and the rest of the world
I have been through 2001,2008 crashes with help from posts from here even though I am UK based -good advice is universal
Now we look like entering the maelstrom once again
Help from Bogleheads will get us through it again I’m sure
Our thoughts must be with the Italians at this time
xxd091
Our own political crisis is brewing up a storm again: the combination of "Max fac" disagreement in The Cabinet and the Irish border question. Our Prime Minister may be about to be pushed on her sword (as opposed to falling on it).

*that* would have financial consequences, depending on the outcome. Markets would react adversely to the uncertainty, and would take a view on the practicality of the next PM's plans - and we would likely have another election in the autumn which means more uncertainty.

Interesting times.
Last edited by Valuethinker on Wed May 30, 2018 8:04 am, edited 2 times in total.

Valuethinker
Posts: 35015
Joined: Fri May 11, 2007 11:07 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Valuethinker » Wed May 30, 2018 8:03 am

bagle wrote:
Tue May 29, 2018 8:55 am
The Eurozone lacks a zone-wide bank bailout mechanism. That is its key structural flaw.
The Eurozone did establish the European Stability Mechanism (ESM) in 2013 to bailout (or more politely, provide financial support) for up to 500 billion Euros. Of course, any bailout would be subject to accepting a Memorandum of Understanding (MoU) whose terms would be anathma to any anti-system political party.
Italy's national debt is c. 2 trillion Euros, I believe. Haven't checked what the assets of the banking system are.

I suspect the ESM would be overwhelmed - and as you noted, the terms might be unacceptable in any case.

dumbmoney
Posts: 2268
Joined: Sun Mar 16, 2008 8:58 pm

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by dumbmoney » Wed May 30, 2018 2:33 pm

Epsilon Delta wrote:
Mon May 28, 2018 10:18 am
dumbmoney wrote:
Sun May 27, 2018 5:32 am
A currency union is very different than a currency peg. The concept of devaluation doesn't really apply. It would take many years to leave the euro in an orderly, sane way - just as it took many years to enter it.
If there is a same and orderly way to breakup the euro zone there is no need to do it and almost nobody would want to do it. Do not look for sane and orderly in a situation that is sure to be disorderly (and perhaps insane).
The blessing of a currency union is that, because there's no short term benefit to leaving, there's no pressure to leave that has to be resisted.
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.

bagle
Posts: 45
Joined: Tue Feb 22, 2011 5:59 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by bagle » Wed May 30, 2018 3:21 pm

Hold...global bond funds
The currency risk is not "little"
That´s what Vanguard Research concluded in their 2013 report. They recommended that a Euro-based investor invest in a globally diversified portfolio of bonds, hedged back to the Euro. They found that for an unhedged portfolio, the currency volatility more than offset the diversification benefits of imperfect (approx. 70%) correlation among national markets.

Of course, all this presumes the continued existence of the Euro, and leaves open the question of what currency risk is being hedged if the Euro were to break up. Perhaps the returns would then be hedged against a new Euro for Germany and other core member states, and this would almost certainly appreciate against the new Lira, Drachma...

User avatar
Lauretta
Posts: 656
Joined: Wed Jul 05, 2017 6:27 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Wed May 30, 2018 3:39 pm

bagle wrote:
Wed May 30, 2018 3:21 pm
leaves open the question of what currency risk is being hedged if the Euro were to break up. Perhaps the returns would then be hedged against a new Euro for Germany and other core member states, and this would almost certainly appreciate against the new Lira, Drachma...
Precisely, that's what I have imagined too: it seems to makes sense, though the whole sitation is very uncertain.
When everyone is thinking the same, no one is thinking at all

Valuethinker
Posts: 35015
Joined: Fri May 11, 2007 11:07 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Valuethinker » Wed May 30, 2018 4:07 pm

dumbmoney wrote:
Wed May 30, 2018 2:33 pm
Epsilon Delta wrote:
Mon May 28, 2018 10:18 am
dumbmoney wrote:
Sun May 27, 2018 5:32 am
A currency union is very different than a currency peg. The concept of devaluation doesn't really apply. It would take many years to leave the euro in an orderly, sane way - just as it took many years to enter it.
If there is a same and orderly way to breakup the euro zone there is no need to do it and almost nobody would want to do it. Do not look for sane and orderly in a situation that is sure to be disorderly (and perhaps insane).
The blessing of a currency union is that, because there's no short term benefit to leaving, there's no pressure to leave that has to be resisted.
I am sure the citizens of Greece agree with you?

I can think of lots of short term benefits to leaving, if you are in the grip of a nominal and real deflation.

Valuethinker
Posts: 35015
Joined: Fri May 11, 2007 11:07 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Valuethinker » Wed May 30, 2018 4:11 pm

bagle wrote:
Wed May 30, 2018 3:21 pm
Hold...global bond funds
The currency risk is not "little"
That´s what Vanguard Research concluded in their 2013 report. They recommended that a Euro-based investor invest in a globally diversified portfolio of bonds, hedged back to the Euro. They found that for an unhedged portfolio, the currency volatility more than offset the diversification benefits of imperfect (approx. 70%) correlation among national markets.

Of course, all this presumes the continued existence of the Euro, and leaves open the question of what currency risk is being hedged if the Euro were to break up. Perhaps the returns would then be hedged against a new Euro for Germany and other core member states, and this would almost certainly appreciate against the new Lira, Drachma...
The hedges would no doubt unwind in all kinds of unpleasant and messy ways. In the worst case, counterparty risk would again raise its ugly head, as financial institutions teetered on, or over, the edge of insolvency.

The underlying bonds would have to redenominate their payments into the successor currencies. Certain countries would go into rescheduling, inflicting losses on bond holders.

I wouldn't be surprised if:

- funds froze redemptions for a period of time, a la the Primary Reserve Fund (and various European property funds, etc.)

- Eurozone interest rates spiked for a period

None of this would be fun and the macroeconomic harm caused could be considerable, or worse than that.

But, eventually, most of the bonds would pay coupons and mature.

I think the real problem is the bank run that would accompany it, rather than the fracturing of the Euro per se.

User avatar
whodidntante
Posts: 3547
Joined: Thu Jan 21, 2016 11:11 pm

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by whodidntante » Wed May 30, 2018 4:26 pm

It's fine if you want to try it. I would consider it part of my fixed income allocation. It could take years to pay off if it happens at all, and in the meantime you rolled short term bunds which probably won't keep up with inflation.

I just returned from Rome a couple of hours ago. You have a beautiful country!

Valuethinker
Posts: 35015
Joined: Fri May 11, 2007 11:07 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Valuethinker » Thu May 31, 2018 2:36 am

whodidntante wrote:
Wed May 30, 2018 4:26 pm
It's fine if you want to try it. I would consider it part of my fixed income allocation. It could take years to pay off if it happens at all, and in the meantime you rolled short term bunds which probably won't keep up with inflation.

I just returned from Rome a couple of hours ago. You have a beautiful country!
The question is whether it's worth closing the stable door or if the horse has already bolted.

If Italy is genuinely in a political crisis this will run and run. And there could be a run on the banks. The Achilles heel of the Eurozone is that you have monetary union without accompanying fiscal union, and no centralized body to bail out banks (no banking union).

If there are new elections to be held, on current polls Italian government debt probably has further to fall-- the spreads will widen against Bunds (German).

If I were Italian, I'd be moving some money outside the country right now, one way or the other. (Thus, the rational decision by each individual turns into a mass panic ;-)). Deposits up to 100k EUR should be fairly safe-- hard for a Eurozone government to go back on *that*. But recall the Greeks did limit withdrawals to 60 EUR per day for a while.

EDIT: some money. Not huge allocation shifts. Generally this does not pay off. But if one can open a bank account in a safer Eurozone country, then why not?
Last edited by Valuethinker on Thu May 31, 2018 5:32 am, edited 1 time in total.

User avatar
Lauretta
Posts: 656
Joined: Wed Jul 05, 2017 6:27 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Thu May 31, 2018 4:19 am

Valuethinker wrote:
Thu May 31, 2018 2:36 am


If I were Italian, I'd be moving some money outside the country right now, one way or the other.
Someone said on an Italian forum that apparently if you move money to a German bank and the euro ceases to exist, you will not get automatically German marks - rather, you would get the currency of your country of residence. So, unless I became a German resident (come to think of it, Berlin is an interesting place and it's probaby good to invest in real estate there :wink: ) this would not solve the problem of the devaluation of the Lira. It would still make sense though if like you say deposits above 100kE aren't safe in Italy; and even below that it's not 100% sure.
I have not been able to find a serious reference to this piece of information though, so it might just be hearsay...
Last edited by Lauretta on Thu May 31, 2018 4:24 am, edited 2 times in total.
When everyone is thinking the same, no one is thinking at all

User avatar
Lauretta
Posts: 656
Joined: Wed Jul 05, 2017 6:27 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Thu May 31, 2018 4:20 am

whodidntante wrote:
Wed May 30, 2018 4:26 pm
I just returned from Rome a couple of hours ago. You have a beautiful country!
Thanks :happy
When everyone is thinking the same, no one is thinking at all

Valuethinker
Posts: 35015
Joined: Fri May 11, 2007 11:07 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Valuethinker » Thu May 31, 2018 5:28 am

Lauretta wrote:
Thu May 31, 2018 4:19 am
Valuethinker wrote:
Thu May 31, 2018 2:36 am


If I were Italian, I'd be moving some money outside the country right now, one way or the other.
Someone said on an Italian forum that apparently if you move money to a German bank and the euro ceases to exist, you will not get automatically German marks - rather, you would get the currency of your country of residence. So, unless I became a German resident (come to think of it, Berlin is an interesting place and it's probaby good to invest in real estate there :wink: ) this would not solve the problem of the devaluation of the Lira. It would still make sense though if like you say deposits above 100kE aren't safe in Italy; and even below that it's not 100% sure.
I have not been able to find a serious reference to this piece of information though, so it might just be hearsay...
It's a pretty good bet there will be a Euro, just a Euro with fewer member countries.

The alternative is that Germany leaves the Euro and has a "new DM". I found that suggestion to be quite lateral.

I find it hard to imagine how a German bank *in its home country* would discriminate against non resident EU citizens holding bank accounts. But perhaps it is possible. If you open up an account with a German bank in Rome, then I could see how they could do that.

Swiss bank accounts remain an option, I guess.

BTW Berlin is "done" for property, and Lisbon is the new frontier. (reality meaning: hipsters are deserting Berlin for Lisbon due to rising property prices, Air BnB effect etc.; lots of money still to go into Berlin before it looks anything like London or Paris). But Lisbon is definitely the new hipster heaven.

User avatar
Lauretta
Posts: 656
Joined: Wed Jul 05, 2017 6:27 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Thu May 31, 2018 5:52 am

Valuethinker wrote:
Thu May 31, 2018 5:28 am
But Lisbon is definitely the new hipster heaven.
Was there at new year's eve. Loved the place; beautiful architecture, particularly the manuelino style, light and fluid. :o
I was told that house prices have already gone up a lot in Lisbon too - but I didn't really look into that.
When everyone is thinking the same, no one is thinking at all

User avatar
whodidntante
Posts: 3547
Joined: Thu Jan 21, 2016 11:11 pm

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by whodidntante » Thu May 31, 2018 6:13 am

Valuethinker wrote:
Thu May 31, 2018 2:36 am

The Achilles heel of the Eurozone is that you have monetary union without accompanying fiscal union, and no centralized body to bail out banks (no banking union).
This rings true for me. It seems obvious to me that Germany benefits greatly from the Euro because it's weaker than the pre-Euro DM and Germany is an export economy. But there are probably some losers as well. It might not be noticed much in boom times, but Italy's economy has been lagging for over a decade. I think it is plausible that Italy is hurt by the Euro and the Italian euroskeptics have it right, but unwinding it will be painful as well.

Being completely selfish, as a frequent traveler to Europe I hope the Eurozone expands to cut down on my foreign currency collection. :twisted:

motorcyclesarecool
Posts: 460
Joined: Sun Dec 14, 2014 7:39 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by motorcyclesarecool » Thu May 31, 2018 6:33 am

whodidntante wrote:
Thu May 31, 2018 6:13 am
Being completely selfish, as a frequent traveler to Europe I hope the Eurozone expands to cut down on my foreign currency collection. :twisted:
Having travelled in pre-Euro Europe, it was fun to bring Italian banknotes with lots of zeroes on them to give my siblings / cousins as gifts upon my return.
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.

User avatar
Lauretta
Posts: 656
Joined: Wed Jul 05, 2017 6:27 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Thu May 31, 2018 7:10 am

motorcyclesarecool wrote:
Thu May 31, 2018 6:33 am
whodidntante wrote:
Thu May 31, 2018 6:13 am
Being completely selfish, as a frequent traveler to Europe I hope the Eurozone expands to cut down on my foreign currency collection. :twisted:
Having travelled in pre-Euro Europe, it was fun to bring Italian banknotes with lots of zeroes on them to give my siblings / cousins as gifts upon my return.
:D yes I remember that at primary school when we were told the rate of conversion of lire to dollars and marks, some of us thought that Italians must be a lot richer than Americans and Germans :D
When everyone is thinking the same, no one is thinking at all

Valuethinker
Posts: 35015
Joined: Fri May 11, 2007 11:07 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Valuethinker » Thu May 31, 2018 7:30 am

whodidntante wrote:
Thu May 31, 2018 6:13 am
Valuethinker wrote:
Thu May 31, 2018 2:36 am

The Achilles heel of the Eurozone is that you have monetary union without accompanying fiscal union, and no centralized body to bail out banks (no banking union).
This rings true for me. It seems obvious to me that Germany benefits greatly from the Euro because it's weaker than the pre-Euro DM and Germany is an export economy. But there are probably some losers as well. It might not be noticed much in boom times, but Italy's economy has been lagging for over a decade. I think it is plausible that Italy is hurt by the Euro and the Italian euroskeptics have it right, but unwinding it will be painful as well.

Being completely selfish, as a frequent traveler to Europe I hope the Eurozone expands to cut down on my foreign currency collection. :twisted:
The idea that a Balance of Payments surplus is always good is, in fact, flawed. Fallacy of Composition. We cannot *all* run B of P surpluses.

Pre financial crash, the Eurozone became a mechanism for recycling German savings into Spanish houses. Now you have badly depressed southern European economies and a near full employment German one. Yes, the pain of Euro entry has hit Italy particularly hard.

Italy has a high debt pool, relatively conservative government finances (among the "risky tier" of Eurostates), but a high domestic savings rate. Italians are not personally overborrowed, but their government is. This is the opposite of UK, Ireland etc. before the Great Financial Crisis, where domestic personal debt levels were too high.

There are great similarities between Italy and Japan. You have hyper mature demographics, institutional rigidity, high government borrowings. Difficult to see now either country gets out of the box, but at least Japan can devalue its currency.

The Germans think they are being virtuous when, in fact, it's all just more evidence that the Eurozone is underperforming.

User avatar
nedsaid
Posts: 9686
Joined: Fri Nov 23, 2012 12:33 pm

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by nedsaid » Thu May 31, 2018 10:07 am

Lauretta wrote:
Tue May 29, 2018 10:33 am
nedsaid wrote:
Sun May 27, 2018 3:30 pm
My take is that markets can do unexpected things. If you think German Bonds are a riskless bet with potentially big upside for Italian investors, chances are that others are noticing that too, particularly the very large institutions. My guess is that this is all built into the price of German Bonds, perhaps German Bonds are overbought here. You could have the dream scenario unfold where these bonds would be hugely profitable only to see the price fall. Markets are like that. Invest in good investments, don't overdo the scenario game. Italy may or may not leave the European Union, even if it does, markets are not obligated to react in the way you think they will. Be careful.
Well I am not claiming that I am the first to notice this; many Italians with savings are considering taking money out of the country as there's the risk our accounts may be frozen and invetsment in foreign assets be prohibited if Italy decides to exit the eurozone.
I don't know whether big institutions are allowed to take all their money abroad; anyway the assumptions of EMH (and the question 'what do you know that the markets don't?' etc) are not really applicable because it's a question of a State which might choose freeze your assets and devaluate the local currency.
Yes, if I lived in Italy I would be nervous about a possible currency change. Brexit, while a big deal is not as big of a deal as a possible Italian exit. The United Kingdom still has its own Central Bank and its own currency, the Pound. The Italians will have to recreate the lira and execute a currency exchange. Can't imagine how this would be done quickly. Italians also have to worry about what is in effect a devaluation.

Don't know about Italy's laws regarding foreign based bank accounts or holding bank accounts denominated in foreign currencies. After leaving the Eurozone, moving money out of Italy might not be so easy as the government would be tempted to impose currency controls. No government wants money fleeing its country or its currency. So hard to say what will happen.

I can see the allure of German bonds here.
A fool and his money are good for business.

Valuethinker
Posts: 35015
Joined: Fri May 11, 2007 11:07 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Valuethinker » Thu May 31, 2018 10:19 am

nedsaid wrote:
Thu May 31, 2018 10:07 am
Lauretta wrote:
Tue May 29, 2018 10:33 am
nedsaid wrote:
Sun May 27, 2018 3:30 pm
My take is that markets can do unexpected things. If you think German Bonds are a riskless bet with potentially big upside for Italian investors, chances are that others are noticing that too, particularly the very large institutions. My guess is that this is all built into the price of German Bonds, perhaps German Bonds are overbought here. You could have the dream scenario unfold where these bonds would be hugely profitable only to see the price fall. Markets are like that. Invest in good investments, don't overdo the scenario game. Italy may or may not leave the European Union, even if it does, markets are not obligated to react in the way you think they will. Be careful.
Well I am not claiming that I am the first to notice this; many Italians with savings are considering taking money out of the country as there's the risk our accounts may be frozen and invetsment in foreign assets be prohibited if Italy decides to exit the eurozone.
I don't know whether big institutions are allowed to take all their money abroad; anyway the assumptions of EMH (and the question 'what do you know that the markets don't?' etc) are not really applicable because it's a question of a State which might choose freeze your assets and devaluate the local currency.
Yes, if I lived in Italy I would be nervous about a possible currency change. Brexit, while a big deal is not as big of a deal as a possible Italian exit. The United Kingdom still has its own Central Bank and its own currency, the Pound. The Italians will have to recreate the lira and execute a currency exchange. Can't imagine how this would be done quickly. Italians also have to worry about what is in effect a devaluation.
It could be done quickly-- the banking software has to have the capacity to accept new currencies, you close the banks for 3 days and redenominate everyone's account and payments. And print new currency-- that can be done quickly. *Has* to be done quickly. So it would be-- because the point of maximum damage is the uncertainty period, so you have to minimize that.

The more difficult issue would be redenominating Italian government debt into New Lira. Not sure what the legal position would be. Effectively that would be an exchange of c EUR 2 trillion of bonds for bonds paying in New Lira. Holders would resist.

And there would be a bank run.
Don't know about Italy's laws regarding foreign based bank accounts or holding bank accounts denominated in foreign currencies. After leaving the Eurozone, moving money out of Italy might not be so easy as the government would be tempted to impose currency controls. No government wants money fleeing its country or its currency. So hard to say what will happen.
Not tempted. It would be a requirement. Just as Iceland did in the 2008 Crash. Standard IMF package of measures in a currency crisis includes the imposition of exchange controls.
I can see the allure of German bonds here.
It's liquidity that is going to disappear if Italy looks like it is lurching towards a It-exit (Lirexit?). That means bank accounts restricted or frozen. That's the issue for the individual Italian resident.

Lynette
Posts: 1729
Joined: Sun Jul 27, 2014 9:47 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lynette » Thu May 31, 2018 10:39 am

Interesting times! I lived in South Africa during the Apartheid era as as many were moving money out of the country. To prevent a run on money, the government slapped on exchange control. One even had to apply for a foreign exchange allowance if going on business or vacation. I forget where the favorite hiding place was - maybe the Cayman Islands. South Africa still has exchange control with multiple hassles.

Dealing with the complexities of foreign exchange, regulations, regulations, regulations and taxes is a real pain.
My advice is to keep all documentation related to foreign transactions for ever.
Last edited by Lynette on Thu May 31, 2018 12:52 pm, edited 3 times in total.

User avatar
Epsilon Delta
Posts: 7423
Joined: Thu Apr 28, 2011 7:00 pm

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Epsilon Delta » Thu May 31, 2018 11:09 am

Lauretta wrote:
Thu May 31, 2018 4:19 am
Someone said on an Italian forum that apparently if you move money to a German bank and the euro ceases to exist, you will not get automatically German marks
There is nothing automatic here. In any breakup the rules will be made up as they go along. Anything could happen. About the only possibility you can rule out is everybody doing the right thing.

User avatar
Lauretta
Posts: 656
Joined: Wed Jul 05, 2017 6:27 am

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Thu May 31, 2018 2:47 pm

Valuethinker wrote:
Thu May 31, 2018 10:19 am

The more difficult issue would be redenominating Italian government debt into New Lira. Not sure what the legal position would be. Effectively that would be an exchange of c EUR 2 trillion of bonds for bonds paying in New Lira. Holders would resist.
Yes I think there are several legal issues, apparently it is harder to convert bonds issued after 2013 in Lire; be as it may simulations have long been made of the impact of the redonomination, see e.g. this (in Italian)

http://marcello.minenna.it/wp-content/u ... 130_FQ.pdf
When everyone is thinking the same, no one is thinking at all

halfnine
Posts: 856
Joined: Tue Dec 21, 2010 1:48 pm

Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by halfnine » Thu May 31, 2018 3:18 pm

If I was in Italy I would probably be willing to accept some currency risk to insure against country risk. I'd allocate some money physically outside of Italy. I'd own German bonds or term deposits for many or the reasons the OP has considered. But, I'd also own USD in short term US bonds to hedge country/region risk that owning Germany bonds might not completely eliminate.

Post Reply