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

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

Post by Lauretta » Sun May 27, 2018 4:24 am

I am from Italy and our next finance minister might be Paolo Savona, a well known eurosceptic (this is assuming the main parties and the president agree on the formation of the new government)
https://www.nytimes.com/reuters/2018/05 ... avona.html

Savona has already given up his position in an investment fund (which interestingly used blockchain technology) to take up the new job as minister.

My question is: if I buy German bonds (or open a CD account in a German bank-though it's not clear to me whether it's possible for a non German resident) I basically have no downside risk (except that for shorter maturities I would lose a little bit of money because of the negative interest rates). If Italy leaves the Eurozone (or the euro disappears) the consensus is that the Italian lira will be devalued and the German mark will appreciate in value, so holding German bonds will instantly be worth a lot more in lira terms (and I will be spending liras for my expenses).
On the other hand, if Italy does not leave the Eurozone, holding German bonds does not hurt (except as I said for a little loss due to the negative interest rates at shorter maturities). So isn't this a basically riskless bet, with hardly any downside but lots of upside possible?
In fact all Italians with savings could do that the day they know that Italy is going to leave the Eurozone (if that day comes).
So is there a catch?
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

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

Post by Valuethinker » 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.

Entry by definition was long and slow: I can't remember the exact nature of it, but the Italian government had to pull some very tricky moves with its debt to qualify for Euro entry-- the Economist termed it the greatest trade of all time (based on the drop in average interest rates on Italian govt debt subsequent to joining the Euro).

The "convergence trade" on Italian, Greek and Spanish government debt worked-- buy the debt in the expectation it would be redenominated in Euros.

But note the earlier failures: on Black Wednesday, Sept 1992, the UK devalued out of the ERM (the predecessor to the Euro), dropping 20% in a day. Soros and others made billions against the Bank of England- The Aldwych beat Threadneedle St ( ;-) a reference to the location of Soros' alma mater, the LSE, vs. the Bank of England). Later, Spain followed suit (there was a lawsuit against Alliance, now Bernstein-Alliance, over the performance of its European govt securities fund over that event).

Exit would have to be:

- fast, because the damage multiplies the longer it takes
- by "surprise" although that's impossible in a country as notoriously leaky as Italy (compared to say, Switzerland, and the abandonment of the 1: 1.20 limit against the Euro)

What's likely to happen, and in fact apparently did happen when President Nixon suspended the Gold Standard, is that the Italian government creates a rival currency for the payment of bills and settlement of debts-- Italy would then just move over to the new currency (imagine if we created the "Trump" and the US govt paid its employees and suppliers in Trumps, and would accept Trumps for payments of taxes - that would take c. 30% of the economy straight into the new currency - during Argentina's problems in the early 2000s, the state governments did something similar).

I would be surprised if the Italian Treasury & Bank of Italy did not have a contingency study somewhere -- given what happened to Greece (Euro negotiations with no plausible alternative, so they got steamrollered).

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

Post by Valuethinker » Sun May 27, 2018 6:01 am

Lauretta wrote:
Sun May 27, 2018 4:24 am
I am from Italy and our next finance minister might be Paolo Savona, a well known eurosceptic (this is assuming the main parties and the president agree on the formation of the new government)
https://www.nytimes.com/reuters/2018/05 ... avona.html

Savona has already given up his position in an investment fund (which interestingly used blockchain technology) to take up the new job as minister.

My question is: if I buy German bonds (or open a CD account in a German bank-though it's not clear to me whether it's possible for a non German resident) I basically have no downside risk (except that for shorter maturities I would lose a little bit of money because of the negative interest rates). If Italy leaves the Eurozone (or the euro disappears) the consensus is that the Italian lira will be devalued and the German mark will appreciate in value, so holding German bonds will instantly be worth a lot more in lira terms (and I will be spending liras for my expenses).
On the other hand, if Italy does not leave the Eurozone, holding German bonds does not hurt (except as I said for a little loss due to the negative interest rates at shorter maturities). So isn't this a basically riskless bet, with hardly any downside but lots of upside possible?
In fact all Italians with savings could do that the day they know that Italy is going to leave the Eurozone (if that day comes).
So is there a catch?
You have interest rate risk on 0 yield government debt. That's significant-- volatility is maximized.

I have long advocated for those residing in the lower credit rating (usually southern) Eurozone countries holding a global govt bond fund (hedged into Euros) to dilute the credit risk of the Italian and Spanish govt bond markets. The yield spread over Bunds tells you that the market thinks the risk is more than 0.
Last edited by Valuethinker on Sun May 27, 2018 6:40 am, edited 1 time in total.

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

Post by Lauretta » Sun May 27, 2018 6:20 am

Valuethinker wrote:
Sun May 27, 2018 6:01 am

I have long advocated for those residing in the lower credit rating (usually southern) Eurozone countries holding a global govt bond fund (hedged into Euros) to dilute the credit risk of the Italian and Spanish govt bond markets.
Yes, I know and this makes sense, but my problem is precisely that I don't understand what would happen to a fund hedged to euro if the euro were to disappear, or if Italy were to exit the eurozone and I bought a fund hedged to euro listed on Borsa di Milano.
I even asked iShares, but I got a pretty general answer which doesn't seem to address the specific question of currency hedged funds when the currency they hedge to ceases to exist. Here's what they said:

"Euro and Eurozone Risk

The deterioration of the sovereign debt of several countries, together with the risk of contagion to other, more stable, countries, exacerbated the global economic crisis. There is a continued possibility that Eurozone countries could be subject to an increase in borrowing costs. This situation as well as the United Kingdom’s referendum have raised a number of uncertainties regarding the stability and overall standing of the European Economic and Monetary Union. The departure or risk of departure from the Euro by one or more Eurozone countries could lead to the reintroduction of national currencies in one or more Eurozone countries or, in more extreme circumstances, the possible dissolution of the Euro entirely. These potential developments, or market perceptions concerning these and related issues, could adversely affect the value of a Fund's investments. Investors should carefully consider how any potential changes to the Eurozone and European Union may affect their investment in a Fund.”
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Sun May 27, 2018 6:34 am

Valuethinker wrote:
Sun May 27, 2018 5:59 am
Soros and others made billions against the Bank of England- The Aldwych beat Threadneedle St ( ;-) a reference to the location of Soros' alma mater, the LSE, vs. the Bank of England).
yes, interestingly he studied philosophy there and was inspired by Karl Popper; it has occurred to me that Popper's falsifiability criterion makes EMH non scientific, as it is not falsifiable in nature, because of the joint hypothesis problem.
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Valuethinker » Sun May 27, 2018 6:44 am

Lauretta wrote:
Sun May 27, 2018 6:34 am
Valuethinker wrote:
Sun May 27, 2018 5:59 am
Soros and others made billions against the Bank of England- The Aldwych beat Threadneedle St ( ;-) a reference to the location of Soros' alma mater, the LSE, vs. the Bank of England).
yes, interestingly he studied philosophy there and was inspired by Karl Popper; it has occurred to me that Popper's falsifiability criterion makes EMH non scientific, as it is not falsifiable in nature, because of the joint hypothesis problem.
To the extent that I understand Popper (not much) I think that's broadly true.

In practice the Efficient Market Hypothesis says "you cannot outperform the market without access to privileged information". That's Type II efficiency, and only the real ultras think the market is Type III efficient (inside information does not help)*. There's plenty of evidence that, with inside information, you can outperform the market e.g. knowing when your nation's Central Bank is going to raise interest rates or devalue the currency.

* to be fair to the ultras, the market spreads move against you even if you have insider information. Your ability to deal in size at anywhere near the market price (liquidity is low; bid-ask spread is wide) reflects the other's sides awareness that you may know something they do not. DFA in fact trades on that basis, punishing brokers who buy and sell large blocks of stock against DFA.

Also there is the Schleifer model. It's hard to short bubbles, and may, in fact, be a better trading strategy to jump on the bubble and ride it. Jim Charnos may eventually proven right on China, but he's had a long 10+ years waiting for it to happen-- it's not been a good strategy, so far.
Last edited by Valuethinker on Sun May 27, 2018 6:50 am, edited 1 time in total.

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

Post by Valuethinker » Sun May 27, 2018 6:48 am

Lauretta wrote:
Sun May 27, 2018 6:20 am
Valuethinker wrote:
Sun May 27, 2018 6:01 am

I have long advocated for those residing in the lower credit rating (usually southern) Eurozone countries holding a global govt bond fund (hedged into Euros) to dilute the credit risk of the Italian and Spanish govt bond markets.
Yes, I know and this makes sense, but my problem is precisely that I don't understand what would happen to a fund hedged to euro if the euro were to disappear, or if Italy were to exit the eurozone and I bought a fund hedged to euro listed on Borsa di Milano.
I even asked iShares, but I got a pretty general answer which doesn't seem to address the specific question of currency hedged funds when the currency they hedge to ceases to exist. Here's what they said:

"Euro and Eurozone Risk

The deterioration of the sovereign debt of several countries, together with the risk of contagion to other, more stable, countries, exacerbated the global economic crisis. There is a continued possibility that Eurozone countries could be subject to an increase in borrowing costs. This situation as well as the United Kingdom’s referendum have raised a number of uncertainties regarding the stability and overall standing of the European Economic and Monetary Union. The departure or risk of departure from the Euro by one or more Eurozone countries could lead to the reintroduction of national currencies in one or more Eurozone countries or, in more extreme circumstances, the possible dissolution of the Euro entirely. These potential developments, or market perceptions concerning these and related issues, could adversely affect the value of a Fund's investments. Investors should carefully consider how any potential changes to the Eurozone and European Union may affect their investment in a Fund.”
To the extent that the fund still held assets in non Italian currencies (assuming a New Lira) the value of those assets would rise as the New Lira fell. probably the fund would be split and the Italian listed version would list in New Lira.

The problem is more one of the dynamics-- how we would get to that state. I imagine Italian financial accounts would be frozen for a time, and the fund frozen to redemptions. Rather as the Primary Reserve money market Fund was so frozen post the Lehman Crash. At least temporarily, Italy would again have exchange controls and probably limits on banking withdrawals.

The model for this is Iceland post Crash. Or Greece when it looked, briefly, like Greece might Grexit the Euro.

The reason the fund companies respond vaguely is because they themselves don't know. Legal contracts did not have warnings about effects of Brexit, because no one imagined the UK would actually vote to do it-- other countries had lurched in that direction but backed off in the final awareness of the disruption it would cause. Now, legal contracts all do include a general clause about the unknown and unknowable effects of Brexit.

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

Post by NoHeat » Sun May 27, 2018 12:16 pm

German 10-year bonds yield 0.4%. I don’t see what’s attractive about them.

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

Post by Lauretta » Sun May 27, 2018 12:35 pm

NoHeat wrote:
Sun May 27, 2018 12:16 pm
German 10-year bonds yield 0.4%. I don’t see what’s attractive about them.
if you read my OP perhaps you will
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

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

Post by nisiprius » 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."
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by xxd091 » 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

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

Post by NoHeat » Sun May 27, 2018 11:24 pm

Lauretta wrote:
Sun May 27, 2018 12:35 pm
NoHeat wrote:
Sun May 27, 2018 12:16 pm
German 10-year bonds yield 0.4%. I don’t see what’s attractive about them.
if you read my OP perhaps you will
I did read your OP. I just don’t see the attraction to a bond that pays an interest rate that’s nil, or even negative. Contrary to what you wrote about “no downside”, it can lose a lot of its principle (when interest rates go up), and until then you will earn little to nothing. The only buyer should be an institution that is legally required to buy those bonds.

For anyone else, the nervous Nellie mattress would be a seemingly better choice, if still not a very good one: https://www.cnbc.com/id/31708955
That’s something I enjoyed seeing in the movie at the 2009 shareholder meeting of Berkshire Hathaway, and in the furniture store. (And by the way, that year was a time of fear that turned out to be a great time to buy equities — if you feel fear about you, that might be worth a thought.)

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

Post by Lauretta » Mon May 28, 2018 12:58 am

NoHeat wrote:
Sun May 27, 2018 11:24 pm
Lauretta wrote:
Sun May 27, 2018 12:35 pm
NoHeat wrote:
Sun May 27, 2018 12:16 pm
German 10-year bonds yield 0.4%. I don’t see what’s attractive about them.
if you read my OP perhaps you will
I did read your OP. I just don’t see the attraction to a bond that pays an interest rate that’s nil, or even negative. Contrary to what you wrote about “no downside”, it can lose a lot of its principle (when interest rates go up), and until then you will earn little to nothing. The only buyer should be an institution that is legally required to buy those bonds.

For anyone else, the nervous Nellie mattress would be a seemingly better choice, if still not a very good one: https://www.cnbc.com/id/31708955
That’s something I enjoyed seeing in the movie at the 2009 shareholder meeting of Berkshire Hathaway, and in the furniture store. (And by the way, that year was a time of fear that turned out to be a great time to buy equities — if you feel fear about you, that might be worth a thought.)
The problem of interest rate sensitivity is easily solved by buying short duration bonds. As I said in my OP, one could use German bonds or CDs, but the problem with the latter is that if you are not a German resident they are complicated to access.
The question I was trying to solve is: how do I deal with the bond part of my portfolio as an Italian investor facing the risk of Italy exiting the eurozone and our currency devaluing overnight by 20%? Putting euros under the mattress won't work; indeed if Italy were to leave the Eurozone I would not be able to use them any longer so they would be worthless to me.
Since I don't want to have 100% in stocks, and cash or Italian bonds are not a good idea for the reasons above, it seemed to me that German short maturity bonds (or CDs) are the best option for the bond or cash part of my portfolio. Unilike US bonds, whose value will fluctuate every day with the dollar vs euro change, German short maturity bonds or CDs will be stable as long as the eurozone exists; if the eurozone disintegrates or Italy gets out, they will appreciate relative to the new Italian currency.
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by david1082b » Mon May 28, 2018 4:19 am

Germany leaving the Euro and its own currency being devalued is also a possibility. Ongoing inflation in Italy is also an issue. Germany could also default on foreign creditors. New governments with different attitudes can always happen. Merkel won't be in power forever and is not as popular as in the past. A global bond index approach could reduce concentration risk somewhat.

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

Post by Lauretta » Mon May 28, 2018 5:32 am

david1082b wrote:
Mon May 28, 2018 4:19 am
Germany leaving the Euro and its own currency being devalued is also a possibility. Ongoing inflation in Italy is also an issue. Germany could also default on foreign creditors. New governments with different attitudes can always happen. Merkel won't be in power forever and is not as popular as in the past. A global bond index approach could reduce concentration risk somewhat.
yes you are correct, it's a possibility though the consensus seems to be that if the Eurozone breaks up it's the Italian lira that will be devalued.
The trouble with a global bond fund is that
1) if I don't currency hedge it will be volatile due to currency exchange swings.
2) if I buy a currency hedged fund and the Eurozone breaks up and the Euro ceases to exist, I have no idea what would happen to the fund, (how can you have a fund hedged to euro when the Euro ceases to exist? see my message above on my exchange with iShares) though probably it would just mean that the fund would be liquidated.
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by dumbmoney » 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.
Last edited by dumbmoney on Mon May 28, 2018 8:06 am, edited 2 times in total.
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Valuethinker » 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".
Last edited by Valuethinker on Mon May 28, 2018 8:09 am, edited 1 time in total.

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

Post by Valuethinker » Mon May 28, 2018 8:08 am

david1082b wrote:
Mon May 28, 2018 4:19 am
Germany leaving the Euro and its own currency being devalued is also a possibility. Ongoing inflation in Italy is also an issue. Germany could also default on foreign creditors. New governments with different attitudes can always happen. Merkel won't be in power forever and is not as popular as in the past. A global bond index approach could reduce concentration risk somewhat.
If you look at German debt to GDP or Current Account surplus (with the world but also the rest of the Eurozone) this is into the realm of very remote possibility. The German economy is near full employment and running massive surpluses with everyone else.

Angela Merkel's fall would not precipitate it. Remember the AfD was originally formed for its *opposition* to the Greek bailout. The anti-immigrant stuff came later. So even a governing coalition with the AfD would be around hard money and hard budgetary targets. Is a situation where De Linke is in power more likely than that? (And even De Linke might turn out to be quite hard money-- remember Syriza was *elected* on a platform of *not* agreeing to the Troika's terms for the Greek bailout).

If German did leave the EUR, then the new DM would go *up* not down.

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

Post by Valuethinker » Mon May 28, 2018 8:11 am

Lauretta wrote:
Mon May 28, 2018 12:58 am
NoHeat wrote:
Sun May 27, 2018 11:24 pm
Lauretta wrote:
Sun May 27, 2018 12:35 pm
NoHeat wrote:
Sun May 27, 2018 12:16 pm
German 10-year bonds yield 0.4%. I don’t see what’s attractive about them.
if you read my OP perhaps you will
I did read your OP. I just don’t see the attraction to a bond that pays an interest rate that’s nil, or even negative. Contrary to what you wrote about “no downside”, it can lose a lot of its principle (when interest rates go up), and until then you will earn little to nothing. The only buyer should be an institution that is legally required to buy those bonds.

For anyone else, the nervous Nellie mattress would be a seemingly better choice, if still not a very good one: https://www.cnbc.com/id/31708955
That’s something I enjoyed seeing in the movie at the 2009 shareholder meeting of Berkshire Hathaway, and in the furniture store. (And by the way, that year was a time of fear that turned out to be a great time to buy equities — if you feel fear about you, that might be worth a thought.)
The problem of interest rate sensitivity is easily solved by buying short duration bonds. As I said in my OP, one could use German bonds or CDs, but the problem with the latter is that if you are not a German resident they are complicated to access.
The question I was trying to solve is: how do I deal with the bond part of my portfolio as an Italian investor facing the risk of Italy exiting the eurozone and our currency devaluing overnight by 20%? Putting euros under the mattress won't work; indeed if Italy were to leave the Eurozone I would not be able to use them any longer so they would be worthless to me.
Since I don't want to have 100% in stocks, and cash or Italian bonds are not a good idea for the reasons above, it seemed to me that German short maturity bonds (or CDs) are the best option for the bond or cash part of my portfolio. Unilike US bonds, whose value will fluctuate every day with the dollar vs euro change, German short maturity bonds or CDs will be stable as long as the eurozone exists; if the eurozone disintegrates or Italy gets out, they will appreciate relative to the new Italian currency.
I think you are better off pursuing a global bond index strategy.

If you wish to do this, then putting savings in German banks seems like a decent strategy. No risk of loss of principal. If it can be done. Italian authorities probably do not like Swiss bank accounts, but you could also try there. Doesn't help you if they shut the bank machines in Italy during a currency crisis, but at least you'd have money outside the country, safe.

My own view is that

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

Post by dumbmoney » Mon May 28, 2018 8:17 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.
Well, that's the misconception that some people had about the Greece crisis. You can't devalue and introduce a new currency at the same time. How do you devalue something that doesn't exist? Leaving the euro won't get you out of a crisis, in fact, that's the worst time to leave.
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Mon May 28, 2018 8:23 am

Valuethinker wrote:
Mon May 28, 2018 8:11 am
Lauretta wrote:
Mon May 28, 2018 12:58 am
NoHeat wrote:
Sun May 27, 2018 11:24 pm
Lauretta wrote:
Sun May 27, 2018 12:35 pm
NoHeat wrote:
Sun May 27, 2018 12:16 pm
German 10-year bonds yield 0.4%. I don’t see what’s attractive about them.
if you read my OP perhaps you will
I did read your OP. I just don’t see the attraction to a bond that pays an interest rate that’s nil, or even negative. Contrary to what you wrote about “no downside”, it can lose a lot of its principle (when interest rates go up), and until then you will earn little to nothing. The only buyer should be an institution that is legally required to buy those bonds.

For anyone else, the nervous Nellie mattress would be a seemingly better choice, if still not a very good one: https://www.cnbc.com/id/31708955
That’s something I enjoyed seeing in the movie at the 2009 shareholder meeting of Berkshire Hathaway, and in the furniture store. (And by the way, that year was a time of fear that turned out to be a great time to buy equities — if you feel fear about you, that might be worth a thought.)
The problem of interest rate sensitivity is easily solved by buying short duration bonds. As I said in my OP, one could use German bonds or CDs, but the problem with the latter is that if you are not a German resident they are complicated to access.
The question I was trying to solve is: how do I deal with the bond part of my portfolio as an Italian investor facing the risk of Italy exiting the eurozone and our currency devaluing overnight by 20%? Putting euros under the mattress won't work; indeed if Italy were to leave the Eurozone I would not be able to use them any longer so they would be worthless to me.
Since I don't want to have 100% in stocks, and cash or Italian bonds are not a good idea for the reasons above, it seemed to me that German short maturity bonds (or CDs) are the best option for the bond or cash part of my portfolio. Unilike US bonds, whose value will fluctuate every day with the dollar vs euro change, German short maturity bonds or CDs will be stable as long as the eurozone exists; if the eurozone disintegrates or Italy gets out, they will appreciate relative to the new Italian currency.
I think you are better off pursuing a global bond index strategy.

If you wish to do this, then putting savings in German banks seems like a decent strategy. No risk of loss of principal. If it can be done. Italian authorities probably do not like Swiss bank accounts, but you could also try there. Doesn't help you if they shut the bank machines in Italy during a currency crisis, but at least you'd have money outside the country, safe.

My own view is that
Thanks for you feedback. The problem with the global bond fund is, as I mentioned, that if it is currency hedged to euro it's not clear what would happen if Italy exits the Eurozone or if the euro disappears altogether. Probably in the first case the fund would still exist and still hedge to euro; in the second it I guess it would be liquidated (?)

Yes I saw on an Italian Forum that many Italians are thinking of opening a Swiss bank accout now!... Seems to me that if you have a euro denominated bank account in Germany, you will get marks if the eurozone desintegrates; in Switzerland if you have a euro denominated bank account it's not clear what would happen in that case. And probably not a good idea to own Swiss francs since, based on the Big Mac argument, they seem 'expensive'.
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Mon May 28, 2018 8:26 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).
+1 this seems quite clear to me. In fact I saw a prensentation (in Italian) last night of Plan B (exiting the euro, as proposed by Savona). It mentioned doing it quickly, and blocking investments in foreign assets whilst doing it.
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by HongKonger » Mon May 28, 2018 8:47 am

Could you not buy a stack of USD and hold them in a term deposit account paying more than the German Bonds outside Italy?

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

Post by Valuethinker » Mon May 28, 2018 9:18 am

Lauretta wrote:
Mon May 28, 2018 8:26 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).
+1 this seems quite clear to me. In fact I saw a prensentation (in Italian) last night of Plan B (exiting the euro, as proposed by Savona). It mentioned doing it quickly, and blocking investments in foreign assets whilst doing it.
Well that crisis has paused, for the moment as the President has refused to appoint him.

But it's an ongoing thing.

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

Post by Lauretta » Mon May 28, 2018 9:20 am

HongKonger wrote:
Mon May 28, 2018 8:47 am
Could you not buy a stack of USD and hold them in a term deposit account paying more than the German Bonds outside Italy?
I guess so; the problem is that if everything in the eurozone works out well and the euro appreciates relative to the dollar, I lose out, particularly since the USDX is pretty high by historical standards. Instead, as I mentioned in the post title, having money in German (short term) bonds (or a German bank account) does not seem to have a downside (except for the negative interest rates producing small losses) but has a big positive upside in case Italian politicians decide to revert to the Lira.
God knows what will happen - just trying to cover myself for different eventualities.
Wish I were an American investor, it seems easier :wink:
Last edited by Lauretta on Mon May 28, 2018 9:22 am, edited 1 time in total.
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Mon May 28, 2018 9:21 am

Valuethinker wrote:
Mon May 28, 2018 9:18 am


Well that crisis has paused, for the moment as the President has refused to appoint him.
yes but now they want to impeach the president for this! It's a pretty crazy situation.
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Valuethinker » Mon May 28, 2018 9:26 am

Lauretta wrote:
Mon May 28, 2018 8:23 am
Valuethinker wrote:
Mon May 28, 2018 8:11 am
Lauretta wrote:
Mon May 28, 2018 12:58 am
NoHeat wrote:
Sun May 27, 2018 11:24 pm
Lauretta wrote:
Sun May 27, 2018 12:35 pm


if you read my OP perhaps you will
I did read your OP. I just don’t see the attraction to a bond that pays an interest rate that’s nil, or even negative. Contrary to what you wrote about “no downside”, it can lose a lot of its principle (when interest rates go up), and until then you will earn little to nothing. The only buyer should be an institution that is legally required to buy those bonds.

For anyone else, the nervous Nellie mattress would be a seemingly better choice, if still not a very good one: https://www.cnbc.com/id/31708955
That’s something I enjoyed seeing in the movie at the 2009 shareholder meeting of Berkshire Hathaway, and in the furniture store. (And by the way, that year was a time of fear that turned out to be a great time to buy equities — if you feel fear about you, that might be worth a thought.)
The problem of interest rate sensitivity is easily solved by buying short duration bonds. As I said in my OP, one could use German bonds or CDs, but the problem with the latter is that if you are not a German resident they are complicated to access.
The question I was trying to solve is: how do I deal with the bond part of my portfolio as an Italian investor facing the risk of Italy exiting the eurozone and our currency devaluing overnight by 20%? Putting euros under the mattress won't work; indeed if Italy were to leave the Eurozone I would not be able to use them any longer so they would be worthless to me.
Since I don't want to have 100% in stocks, and cash or Italian bonds are not a good idea for the reasons above, it seemed to me that German short maturity bonds (or CDs) are the best option for the bond or cash part of my portfolio. Unilike US bonds, whose value will fluctuate every day with the dollar vs euro change, German short maturity bonds or CDs will be stable as long as the eurozone exists; if the eurozone disintegrates or Italy gets out, they will appreciate relative to the new Italian currency.
I think you are better off pursuing a global bond index strategy.

If you wish to do this, then putting savings in German banks seems like a decent strategy. No risk of loss of principal. If it can be done. Italian authorities probably do not like Swiss bank accounts, but you could also try there. Doesn't help you if they shut the bank machines in Italy during a currency crisis, but at least you'd have money outside the country, safe.

My own view is that
Thanks for you feedback. The problem with the global bond fund is, as I mentioned, that if it is currency hedged to euro it's not clear what would happen if Italy exits the Eurozone or if the euro disappears altogether. Probably in the first case the fund would still exist and still hedge to euro; in the second it I guess it would be liquidated (?)
Disruption yes. End of the world? No. We can assume pretty safely that there would be a "core Eurozone" around Germany and a few other countries. Whether we call this the "new DM" or, in deference to Dutch sensibilities, "the Euro (revised)" it would be there. Don't underestimate the French President's urge to save the thing, and to keep France in the Euro as a matter of national pride.

What would happen is the bonds would be redenominated in the new currencies. But there would not be widespread default. So the economic value of the coupon payments and redemptions would still be present.

The fund might freeze to redemptions for a while whilst this is all sorted out, but at the end of the day, there would be bonds, they would pay coupons and redemptions, there is economic value there. However not sure if ETFs can close to redemptions the way a fund can? Not sure how that works?

I could see interest rates going to 5% and then settling down again. Main problem is the bank run - the southern European tier of banks would undergo the Mother of all bank runs.
Yes I saw on an Italian Forum that many Italians are thinking of opening a Swiss bank accout now!... Seems to me that if you have a euro denominated bank account in Germany, you will get marks if the eurozone desintegrates; in Switzerland if you have a euro denominated bank account it's not clear what would happen in that case. And probably not a good idea to own Swiss francs since, based on the Big Mac argument, they seem 'expensive'.
If one really believes in a Euro Crisis, then CHF is not overvalued. It will be a lot higher before it's done. PPP is very much a long term thing. BTW I have never known Switzerland to be anything other than very expensive - have you?

If you are going to do this, you need to do it sooner rather than later.

Otherwise you ride the storm. Keeping a cash balance of Euros (a few weeks expenses) in your flat is probably no bad thing *but* that opens up crime issues (maybe your grandfather's house in Tuscany is a better bet).

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

Post by Valuethinker » Mon May 28, 2018 9:27 am

Lauretta wrote:
Mon May 28, 2018 9:20 am
HongKonger wrote:
Mon May 28, 2018 8:47 am
Could you not buy a stack of USD and hold them in a term deposit account paying more than the German Bonds outside Italy?
I guess so; the problem is that if everything in the eurozone works out well and the euro appreciates relative to the dollar, I lose out, particularly since the USDX is pretty high by historical standards. Instead, as I mentioned in the post title, having money in German (short term) bonds (or a German bank account) does not seem to have a downside (except for the negative interest rates producing small losses) but has a big positive upside in case Italian politicians decide to revert to the Lira.
God knows what will happen - just trying to cover myself for different eventualities.
Wish I were an American investor, it seems easier :wink:
You lose if Eurozone interest rates spike up on a crisis (they might) and if the Euro falls against the USD GBP JPY (that's much more likely). The ECB can forestall the former by buying more bonds (Greece contributed funds to its own bailout; so might Italy ;-)). However it can't save the Euro from falling if the market wants to move it down.

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

Post by freebeer » Mon May 28, 2018 9:37 am

Lauretta wrote:
Sun May 27, 2018 12:35 pm
NoHeat wrote:
Sun May 27, 2018 12:16 pm
German 10-year bonds yield 0.4%. I don’t see what’s attractive about them.
if you read my OP perhaps you will
The point is that there is not really "a big upside possible" for these low-yield German bonds, and there is also a downside from inflation risk. What you call "upside" is really only the possible avoidance of downside that would come from holding potentially cratering Italian bonds.

There are many, many other investment vehicles you could choose to avoid that downside scenario, there's nothing special about German bonds. That there would be an upside from restoration of the German Mark as a currency is extremely speculative. For example you could buy a combination of an all-world stock index fund and all-world bond fund in your chosen equity allocation percentage. That would avoid the downside (mostly - a % of the holdings would be in Italy but the risk is already priced in by the market), be more diversified, mitigate inflation risk thanks to the equity holdings, and have significantly higher expected total return.

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

Post by carguyny » Mon May 28, 2018 9:48 am

Can you set up an Interactive Brokers account? I hold different currencies in it and the rates aren't bad - you can pick when you buy and sell the FX as well. I won't retire in the US so I use it to hold currency of where I will retire and buy ETFs listed in that market/currency.

https://www.interactivebrokers.com/en/index.php?f=1595

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

Post by Lauretta » Mon May 28, 2018 9:54 am

freebeer wrote:
Mon May 28, 2018 9:37 am
Lauretta wrote:
Sun May 27, 2018 12:35 pm
NoHeat wrote:
Sun May 27, 2018 12:16 pm
German 10-year bonds yield 0.4%. I don’t see what’s attractive about them.
if you read my OP perhaps you will
The point is that there is not really "a big upside possible" for these low-yield German bonds, and there is also a downside from inflation risk. What you call "upside" is really only the possible avoidance of downside that would come from holding potentially cratering Italian bonds.

There are many, many other investment vehicles you could choose to avoid that downside scenario, there's nothing special about German bonds. That there would be an upside from restoration of the German Mark as a currency is extremely speculative. For example you could buy a combination of an all-world stock index fund and all-world bond fund in your chosen equity allocation percentage. That would avoid the downside (mostly - a % of the holdings would be in Italy but the risk is already priced in by the market), be more diversified, mitigate inflation risk thanks to the equity holdings, and have significantly higher expected total return.
I like the word 'cratering' :D didn't know that adjective but it describes well what might happen to the Lira and Italian bonds.
Yes of course I have a globally diversified portfolio in stocks. My OP referred to the question of what to do with the bond and cash portion of my portfolio. Since in general the advice here is to avoid currency risk with bonds, I thought this requirement was met by buying bonds issued by a EU government with higher rating than my country's (also, Germany would back in marks which will be stronger than the lira if the eurozone disintegrates). Getting a global bond Etf hedged to euros would also work unless the euro disappears - in this case God knows what would happen to that Etf (how can you hedge to the euro once the euro no longer exists? :? )
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Lauretta » Mon May 28, 2018 9:57 am

carguyny wrote:
Mon May 28, 2018 9:48 am
Can you set up an Interactive Brokers account? I hold different currencies in it and the rates aren't bad - you can pick when you buy and sell the FX as well. I won't retire in the US so I use it to hold currency of where I will retire and buy ETFs listed in that market/currency.

https://www.interactivebrokers.com/en/index.php?f=1595
Thanks that looks interesting I am going to look into it :)
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by Epsilon Delta » 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).

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

Post by Lauretta » Mon May 28, 2018 10:38 am

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 atmosphere certainly feels quite insane at the moment (with the Italian president threatened of impeachment and worse - there've been references to the storming of the Bastille - if he doesn't comply with the populist euroscpetic requests).
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by nedsaid » Mon May 28, 2018 11:05 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."
We probably have all made some kind of financial move in anticipation of an investment theme or scenario unfolding. I have done three such moves but shifts in my portfolio were at most maybe 15% of the total. In other words, I didn't bet my whole portfolio on such and such a scenario. Plus, a big secondary reason, valuation, played a role in those moves. A third big reason for these moves had to do with my increased understanding of portfolio theory. Probably a fourth reason was market timing in its mildest forms.

One such theme that I heard a lot about during the 1980's and 1990's was investing in healthcare stocks because the baby boom is getting old. Well, it wasn't like everyone and their brother didn't know this already. We forget that there are always countervailing trends as well. One such trend is the ruthless costcutting in healthcare. I also saw declining margins when I was a Hospital Accountant, margins for our non-profit hospitals declined from 7% to about 2%.

Again, put your money down on good investments and not forecasts. Forecasts are most often just plain wrong. We lose sight of the actual investments themselves.

As far as "riskless" investments and "big upside", markets have humbled many brilliant people in the past. Markets have a way of finding that Achilles heel, or that one risk you didn't account for. Pretty much, expect the unexpected. I remember hearing people I respect saying that the subprime loan problem was a tempest in a teapot. Problem was, subprime was much bigger than what most experts knew or believed as we found out in late 2008 with the financial crisis. Lots out there we just don't know.
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by HongKonger » Mon May 28, 2018 11:50 am

Lauretta wrote:
Mon May 28, 2018 9:20 am
HongKonger wrote:
Mon May 28, 2018 8:47 am
Could you not buy a stack of USD and hold them in a term deposit account paying more than the German Bonds outside Italy?
I guess so; the problem is that if everything in the eurozone works out well and the euro appreciates relative to the dollar, I lose out, particularly since the USDX is pretty high by historical standards. Instead, as I mentioned in the post title, having money in German (short term) bonds (or a German bank account) does not seem to have a downside (except for the negative interest rates producing small losses) but has a big positive upside in case Italian politicians decide to revert to the Lira.
God knows what will happen - just trying to cover myself for different eventualities.
Wish I were an American investor, it seems easier :wink:
I guess I hedge all ways around. I hold term deposits in Euro and USD and I spend dividends paid out in HKD which is pegged to USD and Leva which is pegged to the Euro. I buy/sell/hold currencies in all directions according to the most favourable exchange rates and interest rates :D

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

Post by Valuethinker » Mon May 28, 2018 4:29 pm

Lauretta wrote:
Mon May 28, 2018 10:38 am
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 atmosphere certainly feels quite insane at the moment (with the Italian president threatened of impeachment and worse - there've been references to the storming of the Bastille - if he doesn't comply with the populist euroscpetic requests).
To me, it's an argument for caution.

Hold global stocks, and global bond funds.

Maybe increase your emergency reserves and try to hold them in a Swiss or German bank account.

Don't get cute. If this is a full blown crisis it will get a lot worse. If it's not, then Italian stocks and bonds will snap right back.

So far, the Eurozone has managed to muddle through, although I admit this crisis is of a lot bigger scale, potentially.

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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 2:13 am

If you want to buy German bunds, you can open an account directly with the Germany finance agency ("Finanzagentur") in Frankfurt. A Spanish colleague of mine did so during the height of the previous Euro crisis in 2012 by visiting their office, though they also gave him a form (in German only, as is their web page below!) to fax to them to open the account.

https://www.deutsche-finanzagentur.de/d ... buchkonto/

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

Post by silverex » Tue May 29, 2018 3:37 am

For CDs, you can check a European deposit marketplace such as Raisin - you can put your deposit to any of them. Beware that you might have to declare it to your tax agency manually.

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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 5:31 am

Valuethinker wrote:
Mon May 28, 2018 4:29 pm


Hold global stocks, and global bond funds.

Maybe increase your emergency reserves and try to hold them in a Swiss or German bank account.

Don't get cute. If this is a full blown crisis it will get a lot worse. If it's not, then Italian stocks and bonds will snap right back.
Yes luckily my stocks are globally diversified (I am only very slightly overweight in Italy (relative to a global market cap weighted allocation) because of its low CAPE and because Prof. Shiller said he overweighted Italy). This morning as I watched the past gains of my Italian fund in the process of disappearing, I was thinking about Ray Dalio who shorted Italian stocks some time ago and I am thinking 'Wow, that man is a genius!!! :idea: ' But then, there are so many parameters in these kinds of bets that perhaps he was lucky.
Anyway, it's especially in periods like these that it feels good to be globally diversified. 8-)
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Lauretta
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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 5:39 am

bagle wrote:
Tue May 29, 2018 2:13 am
If you want to buy German bunds, you can open an account directly with the Germany finance agency ("Finanzagentur") in Frankfurt. A Spanish colleague of mine did so during the height of the previous Euro crisis in 2012 by visiting their office, though they also gave him a form (in German only, as is their web page below!) to fax to them to open the account.

https://www.deutsche-finanzagentur.de/d ... buchkonto/
Thanks, :happy I'll check that out; my German is quite basic and I only learnt some many years ago to be able to read the poetry; I think the German used in finance will be quite different from that used by Hölderlin! :D but I'll see how I manage.
Btw do you also have information about opening a simple bank account in Germany? Having a saving account or CD in Germany would be a good idea I think, but when I looked into it some time ago there seemed to be restrictions for non residents.
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columbia
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Re: German Bonds: a virtually riskless bet for an Italian investor, with no downside and a big upside possible?

Post by columbia » Tue May 29, 2018 5:43 am

Allowing for the devaluation a few years ago, how are Swiss Francs viewed in the context of Eurozone turmoil? I might be 30 years behind in that thinking, of course. :)

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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 6:18 am

do you also have information about opening a simple bank account in Germany?
I haven't done it myself, but this source seems credible::

https://banks-germany.com/german-bank-a ... -residents

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Lauretta
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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 6:26 am

bagle wrote:
Tue May 29, 2018 6:18 am
do you also have information about opening a simple bank account in Germany?
I haven't done it myself, but this source seems credible::

https://banks-germany.com/german-bank-a ... -residents
Thanks! :happy
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xxd091
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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 6:43 am

If you have globally diversified the Equity portion of you Portfolio for safety and growth-why would you not do the same with your Bonds
A Global Bond Fund -admittedly it would have to be hedged to the Euro-has over 50% US bonds plus German French and British etc
Betting on Germany is OK but it is one country-it now underwrights the Euro-for 27 other countries -no pressure!
Historically Germany has not performed too well when they are the sole controlling agent.
Seems to be getting messy out there
xxd091

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

Post by Valuethinker » Tue May 29, 2018 7:35 am

columbia wrote:
Tue May 29, 2018 5:43 am
Allowing for the devaluation a few years ago, how are Swiss Francs viewed in the context of Eurozone turmoil? I might be 30 years behind in that thinking, of course. :)
Devaluation?

They pegged the CHF to 1.20 EUR to the CHF. i.e. a "cap" on the CHF value.

The speculators then took a huge bet against the Swiss central bank, eventually the Swiss caved, exchange rate shot to 1: 1.40. CHF went *up*. The Swiss central bank admitted it couldn't bear the pain of fighting the speculators. They "broke the bank" (see George Soros v. Bank of England in September 1992).

It's settled back down since then. It will remain a traditional "flight to safety" currency.

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

Post by Valuethinker » Tue May 29, 2018 7:37 am

xxd091 wrote:
Tue May 29, 2018 6:43 am
If you have globally diversified the Equity portion of you Portfolio for safety and growth-why would you not do the same with your Bonds
A Global Bond Fund -admittedly it would have to be hedged to the Euro-has over 50% US bonds plus German French and British etc
Betting on Germany is OK but it is one country-it now underwrights the Euro-

Code: Select all

[u]for 27 other countries[/u]
-no pressure!
Historically Germany has not performed too well when they are the sole controlling agent.
Seems to be getting messy out there
xxd091
There are 19 countries in the Eurozone. Did you mean 19?

Germany is 29.2% of Eurozone GDP (quick check on Google). Roughly speaking, that is its percentage of any bailout. France is another 21% or so so that's 50% right there.

If Italy gets into trouble it will (as Greece did) contribute to its own bailout ;-).

The problem will be the Italian bank run. That is the key risk with an Italian exit move. Everyone with deposits in Italian banks will try to get them into a bank of a country that will stay in the Eurozone-- deposits will flow out like water running down a hill.

The Eurozone lacks a zone-wide bank bailout mechanism. That is its key structural flaw.

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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.
Last edited by bagle on Tue May 29, 2018 9:00 am, edited 2 times in total.

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