Bond yields have been compressed for years by the actions of the Federal Reserve, and things aren’t set to get better. As the European Central Bank sets up for its own interference in the price of bonds, debt investors are looking for ways to cash in on bond investment even as yields become worthless.
Apart from an investment in Greek debt, something that’s not advisable without a real understanding of the risks, there is no European government debt that offers any reasonable yield. Countries that previously entered European programs, like Spain and Ireland, are trading at yields of 0.787% and 0.549% respectively for five year maturities on this morning’s market.
With no money to be made from buying and holding government bonds, often not even enough to beat the measly inflation in the Eurozone, traders are looking to play the bigger movements in the bond market in the hopes of buying low and selling high. Anyune who bought European bonds six months ago will have seen good returns, but hindsight can have an over-active effect on investing confidence.
Bond volatility jumped at the end of last year as the price of oil caused ructions across the markets, and speculation of ECB intervention fueled changes in European yields and a spillover into international markets, both sovereign and corporate. Betting on continued volatility in the market is one way in which investors are chasing the returns that are non-existent by focusing on income.
Francisco J. Simon, a securities expert at Santander Asset Management, is betting that long term debt in some of the worst hit regions of Europe will increase in price, and decrease in yield, by an inordinate amount during 2015. This implies a belief that the ECB will not only introduce Quantitative Easing, it will do so for an extended period, similar to that seen in the United States.
Simon is buying up as much of the long term debt as he can get, with up to 30-year bonds forming part of his portfolio. According to an interview he gave to Businessweek, he believes not only that long term bond yields will converge with short term yields, but also that core European nations like Germany will see their yields converge with countries like Spain as part of the same process.
A related bet involves investing in long term UK debt, yields of which have been moving in lock-step with Spanish bonds in recent months. As volatility has increased on the bond market, a number of these ideas have appeared, and they’re likely to continue popping up as long as price changes remain a day-to-day or week-to-week phenomenon.
It may be difficult for the individual investor to do well in the bond market, given the large costs involved in trading the securities. There are, for those looking to invest in sovereign debt, mutual funds and ETFs that allow exposure to these strategies at a fraction of the cost. Betting on European bond price increase to produce return is risky, however: there is a Greek elephant in that particular room.