Buy bunds via an ETFCreated:24 March 2010Updated:29 March 2010 Written by:Mark Glowrey
With the spotlight likely to remain on the state of the UK gilt market before and after the election, you might want to consider other options for sovereign debt. And guess whose bonds are precision-engineered to financial perfection? Yes, it’s the Germans.
In a straight contest between gilts and German government bonds (known as bunds), there is no doubt that the German investor is being kept in Porsches by a total return of 7.1 per cent since June 2009, compared with a decline of 3.5 per cent for the gilt holder.
However, there’s an obvious complication to buying euro-denominated debt: currency risk. Over the past 12 months, the sterling/euro currency pair has traded in a range of 9 per cent, much greater than the moves seen in the bonds. So it is fair to view overseas bonds as a forex play, as well as an income investment.
Sterling investors who shifted into Euro funds when the pound was 27 per cent higher have benefited accordingly. However, if the pound were to strengthen against the euro, anyone buying now might see their returns eroded.
In terms of the practicalities of trading European government bonds, things are looking up for the private investor. Bondscape, the wholesale dealing platform used by brokers to execute fixed-income trades, will shortly be offer a trading facility in bunds. These bonds will be dealt and settled in euros, although investors with Sterling-based accounts will be pleased to know that the platform will also offer Sterling pricing and settlement for ease of administration.
An alternative would be to buy an exchange-traded fund investing in European sovereign debt. iShares offer an excellent range of vehicles in this asset class covering both the short, medium and longer-dated end of the curve. These ETFs are backed by physical holdings, concentrated on the major and more creditworthy sovereigns.
See other bond of the week features.
Check out our free investment guide to bonds.
Daily prices, charts and data for gilts, linkers, corporate bonds and Pibs – now includes downloadable prospectuses for Pibs issues!
Read the IC cover feature on bonds.
MARK’S VIEW:Buy
The best play looks to be the iShares 7-10 year € government bond ETF (IBGM). The holdings are mostly German, French and Dutch (although some Italian issues do sneak in). As with most ETFs, the total expense ratio is quite reasonable at 0.2 per cent, and the bid-offer spread is tight, circa 0.14 per cent, according to the latest prices. It is priced in euros, though, so be aware of the currency risk.
Bond of the week is supplied by fixedincomeinvestor.co.uk and is subject to their disclaimer.
Buy bunds via an ETF
