Corporate/government yield spreads on foreign bonds?

[jefmafnl]

We (US citizens, retired, living in Europe) are looking for a non-US bond fund to protect us against a weaker dollar in the future. Our financial planner suggests investment grade rather than government bonds, but the options are limited and we're skeptical that the higher yields justify the higher expense ratios.

Could anyone please suggest a data source about the historical yield spreads of foreign corporate bonds over foreign government bonds?

Thanks!

J

[DoctorE]

https://am.jpmorgan.com/de/en/asset-man ... e-markets/
Page 68

Vanguard EUR Corporate Bond UCITS ETF Accumulating/Distributing
ISIN IE00BGYWT403
4.28% YTW
4.6Y Duration
0.09% TER
Somewhat low assets in the accumulating class, so check the bid/ask spread when you trade this.

BTW Inflation in Europe is 10% so these are almost 'guaranteed' to lose money in real terms unless the ECB starts cutting rates and inflation somehow disappears.

Check out justETF for other European UCITS bond funds.

[Valuethinker]

https://am.jpmorgan.com/de/en/asset-man ... e-markets/
Page 68

Vanguard EUR Corporate Bond UCITS ETF Accumulating/Distributing
ISIN IE00BGYWT403
4.28% YTW
4.6Y Duration
0.09% TER
Somewhat low assets in the accumulating class, so check the bid/ask spread when you trade this.

BTW Inflation in Europe is 10% so these are almost 'guaranteed' to lose money in real terms unless the ECB starts cutting rates and inflation somehow disappears.

Check out justETF for other European UCITS bond funds.

They are US citizens and they cannot hold this due to IRS PFIC rules - very painful, I gather.

They need US-domiciled funds (in practice that means US listed). However EU brokers will not sell them such funds because they lack the required documentation. Catch-22. They may be able to upgrade their status to expert investor (I forget the regulatory term) which offers one way around it.

Otherwise hopefully they still have a US account for investing in funds and/or ETFs.

[Valuethinker]

We (US citizens, retired, living in Europe) are looking for a non-US bond fund to protect us against a weaker dollar in the future. Our financial planner suggests investment grade rather than government bonds, but the options are limited and we're skeptical that the higher yields justify the higher expense ratios.

Could anyone please suggest a data source about the historical yield spreads of foreign corporate bonds over foreign government bonds?

Thanks!

J

You need to find a US listed fund or ETF that invests in foreign bonds and is not currency hedged. I am guessing there must be such somewhere in US markets? And you need a US broking account because an EU broker won't sell you these investments.

There's a non US investors sub board here and it's worth posting there - you get posters who are experienced with the ways of the IRS & PFIC. Also there's a wiki for Americans living abroad, I believe. Welcome to the hell, that is taxation by citizenship, is all I can say - but you knew that.

Your alternative is direct purchase of foreign currency bonds. Your intuition is right then - you would want govt bonds - limited or no credit risk.

Depending upon where you live that might be highly rated Eurozone bonds. Or local ones. My main concern is that Italy is not entirely risk-free -- the higher yields on Italian govt bonds tells you that (spread over German govt).

To be honest, the equivalent of bank CDs within the Eurozone insurance limited (100k EUR per individual per financial institution I believe) may be your best bet. Make *sure* they are not selling you an uninsured bond product -- a depositor so afflicted in Spain set himself on fire outside a branch and burned to death. When the world's oldest bank Bank di Paschi di Sienna (sp?) was being rescued, there was a threat that such individual bondholders would be heavily diluted.

Also you have to be sure that your national govt can bail the bank out. So in a small Baltic state for example, that might have some question. When Iceland was in that position, it froze all foreign exchange - I think foreign depositors eventually got their kronor back, but the IKR was worth a lot less. It's not the European Central Bank and the Eurozone that does the bailouts, it's the local national government.

(Italy is always my big quandary. It's nearly half the Eurozone govt bond market. It's PM is... well you know. In theory it's so apocalyptic that Italy should renege on govt debts, exit the Euro, etc. But 2008-09 shook my confidence in the fundamental stability of finance. And recent events in the UK and Liz Truss' 44 days as Prime Minister, basically ended by a rout in the govt bond market ... the cold & damp Italy, we seem to have become).

[seajay]

We (US citizens, retired, living in Europe) are looking for a non-US bond fund to protect us against a weaker dollar in the future. Our financial planner suggests investment grade rather than government bonds, but the options are limited and we're skeptical that the higher yields justify the higher expense ratios.

Could anyone please suggest a data source about the historical yield spreads of foreign corporate bonds over foreign government bonds?

Once upon a time, money was gold/silver, worth its weight. Kings/State would borrow that gold (money) in return for paying interest and broadly inflation averaged 0%.

That ended in the 1930's, first in the UK (1931), followed by the US in 1933. Money became 'fiat'. For international trade purposes the US Dollar became the accepted alternative to gold, where the US promised to peg the US dollar to gold. But as with all fiat currencies that promise didn't sustain.

When someone (states) can print/spend money as it is no longer backed by anything tangible, so the tendency is that sooner or later money will be printed/spend, that devalues all other notes in circulation. Such 'sovereign' states no longer need to borrow money, they can just print it. The same nowadays also holds true for banks, when you borrow money they just 'create it'. No longer need to match lenders/borrowers. Pension funds may be obligated to lend to the state, as in combination inflation (which is just another form of taxation) and direct taxation is beneficial to the state.

Bank of Japan mostly buys up all of the debt that it state issues. As is similar but to less extremes in other countries, UK, US, ...etc. States nor banks no longer need to borrow and accordingly pay little for such offers/lending, maybe even negative real yields after inflation/taxation for those that do.

Better currencies/monies are those that are backed by something tangible, such as stocks and/or gold. Currencies such as Yen, Pounds, Dollars are just a convenient way to avoid having to barter.

Corporate bonds are little different, pay more interest than treasuries in reflection of higher default risk. But are more in need of such loans, cannot print/spend money directly themselves such like how the state and banks can.

Circumstances have changed. Pre 1930's and lending money (gold) to the state was a reasonable choice, you were inclined to yield a positive real return from doing so. Since the 1930's however and you needed to invest elsewhere rather than lending to entities that can direct inflation (print/spend money), taxation, interest rates and/or change the rules.

A better choice IMO is to hold tangible assets, stocks and gold. How much, well 80/20 perhaps. If 80 stock value halves to 40, when 20 gold doubles to 40, then you have the option to sell gold to buy stocks, where you can double up on the number of shares being held. What might drive such a stocks halving, well often fiat currency concerns/risk, when the currency declines, inflation and interest rates rise, as does the price of gold in that currency tend to rise.

You can revise those weightings down if you like, to perhaps 50/50 stock/gold, half fiat currency (US$ invested in US stocks, gold non-fiat global currency), which also dials down counter party risk (gold in-hand has no counter party risk). You might even dial down that to maybe even include some treasury bonds if you don't mind the drag that is inclined to induce. The Permanent Portfolio for instance opts for half in 50/50 stock/gold and half in treasuries (it prefers to hold a 1 and 20 year treasury barbell than a 10 year central bullet). Whilst you could opt for corporate bonds, they have greater risk of potential partial, maybe total, failure to be repaid.

Non-US bonds/treasuries have even higher risk than US bond/treasuries. Lending nowadays is akin to lending to someone where the terms and conditions are heavily biased in their favor and where paper notes and steel based coins are worth near nothing. Better to hold tangible assets, the likes of stocks and gold. Weighting gold according to how much of a hedge you wish to place against possible declines in the US$

[jefmafnl]

Thanks to all who replied. (I did also ask on the non-US section of the forum.)

We still can access US-domiciled funds through our Vanguard (US) accouns. However, for non-US bonds,we didn't find any suitable US-domiciled, unhedged funds or ETF's. The closest were IBND (but tracking error of about 1% per year) and WIP (inflation-protected government bonds, but 30% emerging markets).

Regarding non-US domiciled funds and ETF's, JustETF seemed to have almost exclusively ESG ETF's. We are looking on Morningstar.co.uk, and at ABN AMRO (our bank in the Netherlands). The PFIC issue is not important for us, as we can take Foreign Tax Credit for the substantial asset taxes that we pay in the Netherlands.

J

[Valuethinker]

Thanks to all who replied. (I did also ask on the non-US section of the forum.)

We still can access US-domiciled funds through our Vanguard (US) accouns. However, for non-US bonds,we didn't find any suitable US-domiciled, unhedged funds or ETF's. The closest were IBND (but tracking error of about 1% per year) and WIP (inflation-protected government bonds, but 30% emerging markets).

Regarding non-US domiciled funds and ETF's, JustETF seemed to have almost exclusively ESG ETF's. We are looking on Morningstar.co.uk, and at ABN AMRO (our bank in the Netherlands). The PFIC issue is not important for us, as we can take Foreign Tax Credit for the substantial asset taxes that we pay in the Netherlands.

J

I did not realize there was ever a situation where a US taxpayer, abroad, could ignore PFIC (if they held the non-US domiciliary funds).

There is such a thing as an ESG ETF that invests in bonds if that is of interest.

Given you live in the Netherlands, I think either term deposits (CDs) in Dutch banks, or Dutch government bonds directly held, could be a valid alternative to a bond fund.