why large difference yield US$ vs euro corporate bonds

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euroman
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Joined: Thu Jan 30, 2014 8:28 am

why large difference yield US$ vs euro corporate bonds

Post by euroman »

I noticed a large difference in yield between US$ and euro corporate investment grade bonds:

iShares Core Euro Corporate Bond UCITS ETF
YTM 1.47%
http://www.ishares.com/uk/individual/en ... -ucits-etf
(edit: correct link)

iShares $ Corporate Bond UCITS ETF
YTM 3.89%
http://www.ishares.com/uk/individual/en ... -ucits-etf

Can anyone explain this large difference in yield (2.42%) for what seem to be bonds with similar risk?
thank you.
Last edited by euroman on Wed Feb 17, 2016 9:12 am, edited 1 time in total.
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nisiprius
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Re: why large difference yield US$ vs euro corporate bonds

Post by nisiprius »

Not sure, but I see from Googling on their literature that:

"The Base Currency of iShares $ Corporate Bond UCITS ETF is US Dollar (US$)"
"The Base Currency of iShares Core Euro Corporate Bond UCITS ETF is Euro (€)"

That is, they are not currency-hedged. What currency is the yield being reported in? What is your home currency?

At the risk of pointing out the obvious, currency movements are large, and whenever you throw them into the picture you are increasing your risk. Broadly you might say that currency risk isn't quite as high as stock risk but it's still enough to raise stock risk noticeably, if you are investing in a currency foreign to you. In the case of bonds, currency risk is relatively huge. Unless the fund has bought contracts to hedge the currency risk, a bond fund in a foreign currency does not really behave like a bond fund at all--it behaves mostly like an investment in foreign currency itself.
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stratton
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Re: why large difference yield US$ vs euro corporate bonds

Post by stratton »

10 year sovereign bond yields from Saturday Jan 13, 2016 Financial Times:

Code: Select all

Australia        2.59
Austria          0.56   Euro
Belgium          0.76   Euro
Canada           1.14
Denmark          0.53
Finland          0.54   Euro
France           0.62   Euro
Germany          0.21   Euro
Greece          11.32   Euro

Code: Select all

Ireland          1.04   Euro
Italy            1.68   Euro
Japan            0.08
Netherlands      0.37   Euro
Norway           1.20   Euro
Portugal         4.27   Euro
Spain            1.85   Euro
Switzerland     -0.31
UK               1.56
USA              1.68
I don't know the bond specific weights for various countries, but Germany and France are the largest of the Euro issuers.

Considering spreads for corporate bonds over sovereigns and yield curves... I'd expect US corporates to be higher.

Paul
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Valuethinker
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Re: why large difference yield US$ vs euro corporate bonds

Post by Valuethinker »

stratton wrote:10 year sovereign bond yields from Saturday Jan 13, 2016 Financial Times:

Code: Select all

Australia        2.59
Austria          0.56   Euro
Belgium          0.76   Euro
Canada           1.14
Denmark          0.53
Finland          0.54   Euro
France           0.62   Euro
Germany          0.21   Euro
Greece          11.32   Euro

Code: Select all

Ireland          1.04   Euro
Italy            1.68   Euro
Japan            0.08
Netherlands      0.37   Euro
Norway           1.20   Euro
Portugal         4.27   Euro
Spain            1.85   Euro
Switzerland     -0.31
UK               1.56
USA              1.68
I don't know the bond specific weights for various countries, but Germany and France are the largest of the Euro issuers.

Considering spreads for corporate bonds over sovereigns and yield curves... I'd expect US corporates to be higher.

Paul
Paul is right Euro paying govt bonds are at much lower yields than US govt bonds.

Corporates are priced off the govt bond yield curve (for same maturity). So the credit spread in basis points (1/100ths of 1%) off a negative number is a smaller positive number.

I think Nestle Corp bonds (CHF) are at a negative nominal yield, in fact.
Valuethinker
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Re: why large difference yield US$ vs euro corporate bonds

Post by Valuethinker »

nisiprius wrote:Not sure, but I see from Googling on their literature that:

"The Base Currency of iShares $ Corporate Bond UCITS ETF is US Dollar (US$)"
"The Base Currency of iShares Core Euro Corporate Bond UCITS ETF is Euro (€)"

That is, they are not currency-hedged. What currency is the yield being reported in? What is your home currency?

At the risk of pointing out the obvious, currency movements are large, and whenever you throw them into the picture you are increasing your risk. Broadly you might say that currency risk isn't quite as high as stock risk but it's still enough to raise stock risk noticeably, if you are investing in a currency foreign to you. In the case of bonds, currency risk is relatively huge. Unless the fund has bought contracts to hedge the currency risk, a bond fund in a foreign currency does not really behave like a bond fund at all--it behaves mostly like an investment in foreign currency itself.
I don't know what the stats are re currency risk, but my sense is it is potentially as large as equity risk?

Thinking more the Emerging Markets case perhaps.

Stock markets go down, the world doesn't notice. Exchange rates move 20%, the world notices. I am exaggerating the position in this 24/7 world where stock markets count as "news" but most ordinary people I don't think connect the stock market to their wellbeing (this forum an exception). But they do sure as heck notice it if their holiday this year is a £1000 more because the pound dropped 30% against the Euro and the dollar at the start of the financial crisis.
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Re: why large difference yield US$ vs euro corporate bonds

Post by Clive »

Valuethinker wrote:Stock markets go down, the world doesn't notice. Exchange rates move 20%, the world notices. I am exaggerating the position in this 24/7 world where stock markets count as "news" but most ordinary people I don't think connect the stock market to their wellbeing (this forum an exception). But they do sure as heck notice it if their holiday this year is a £1000 more because the pound dropped 30% against the Euro and the dollar at the start of the financial crisis.
I recall that my US stock holdings were near unchanged during the financial crisis. Whilst both UK and US stocks were down by similar % amounts something like -35% or whatever, the FX benefits of holding US$ priced stocks negated the US stock share price declines - from a UK investors perspective. And in 2010 I made a killing in selling gold (sold the lot after having held for years and seen little), the proceeds of which in buying relatively low priced UK stocks subsequently churned out some nice profits too.
Topic Author
euroman
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Re: why large difference yield US$ vs euro corporate bonds

Post by euroman »

stratton wrote:10 year sovereign bond yields from Saturday Jan 13, 2016 Financial Times:

...

Considering spreads for corporate bonds over sovereigns and yield curves... I'd expect US corporates to be higher.

Paul
that explains it, thanks.
Though the spread between risk free 10y Eurobonds (eg from Germany) and 10y treasuries is 1.46, therefore there is still an almost 1% difference.
Digging a bit deeper, the corporate euro ETF has a duration of 5years, while the US$ corporate ETF has a duration of 8 years.
Maybe the larger duration risk (with looming interest increases) explains the remaining 1%?

If I were a US invester, I would put a significant amount of my fixed income in a US$ investment grade corporate bonds ETF with such high yield, or am I missing something?
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Re: why large difference yield US$ vs euro corporate bonds

Post by LadyGeek »

I removed a number of off-topic comments related to: EU "QE'ing", Brexit, politics (refugees and Schengen), border problems due to migration, fiscal bailout, failed EU states. The thread was getting derailed. (See: Non-actionable (Trolling) Topics)

Please stay on topic, which is understanding why the yields are different between 2 funds.
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lee1026
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Re: why large difference yield US$ vs euro corporate bonds

Post by lee1026 »

I think the difference is in the duration. On the US fund, the bond fund have a duration of 12 years. The 20 year treasury is at 2.24%. On the Euro fund, duration is 5 years. The 5 year bund is at negative 0.3%.

That is a difference of 2.5%, which is around the same gap that you see in the fund yields.
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