PP Europe (Germany)

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neilk
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PP Europe (Germany)

Post by neilk » Thu Dec 13, 2018 6:33 am

Hi everyone,

I am looking for recommendations for implementing a PP in Europe, speciafically the bond/cash portion. There's an exchange rate risk with gold too - but that's simply the way it is.

1. Bonds - I was looking at buying a German government bond ETF, preferably spanning varying maturities to lower the interest rate risk. These ETFs, however, seem to have a substantial Portion (>50%) of bonds at 0% coupon. The next best options seems to be buying an EU-wide ETF (specifically, ISIN LU1287023342 with bonds from German, Austrian, Dutch, French and Finnish governments) with still has about 13% bonds at 0% coupon. Considering the maniacal ZIRP being adhered to by the ECB, does it make any sense to invest in EU bonds? At the moment my entire bond portfolio consists of US treasuries.

2. Cash - ZIRP rears its ugly head again. Within Germany I'd have to do a lot of work to find a bank paying even 1% on a CD or term deposit. Most banks offering anything of note are in EU countries where I would not want to keep any part of my money.

Taking into account the fact that the EU as a whole is still in frail economic health and the situtation in certain EU countries could go t*ts up anytime, are there any options for EU investors on the bond/cash front?

Would really aprreciate any inputs/recommendations.
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europeanwizard
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Re: PP Europe (Germany)

Post by europeanwizard » Thu Dec 13, 2018 7:33 am

For bonds, I've got the iShares E GOV7-10, IE00B1FZS806. As you'd guess from the name, maturity is 7 to 10 years. This is the longest maturity I'm willing to buy. I may get rid of the whole thing, and get some sort of global bond ETF. I also no longer hold EU stocks, I went global.

For cash, I went with a 0.55% term deposit. It's just the way it is.
Kike Moreno
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Re: PP Europe (Germany)

Post by Kike Moreno » Thu Dec 13, 2018 12:55 pm

I think that for bonds the closest you can get to a PP in euros is to buy the longest German bond available, which currently is the one that expires at 2048 and ISIN DE0001102432 (current yield 0.90%). Remember that you get the long bonds not for the yield but for the deflation protection.

If you prefer ETFs they should be long term and high quality, like these:
- Deka Deutsche Boerse EUROGOV Germany 10+ UCITS ETF DE000ETFL219
- iShares eb.rexx Government Germany 10.5+ (ETF) DE000A0D8Q31

If you prefer a mutual fund, this one is an option but it contains lower quality bonds: Vanguard 20+ Year Euro Treasury Index Fund IE00B246KL88

With regard to the cash, if the bank account is in a safe country and the amount is covered by the deposit guarantee limit then I think it's ok.
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europeanwizard
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Re: PP Europe (Germany)

Post by europeanwizard » Sat Dec 15, 2018 1:05 am

Here's an interesting discussion about these lower yields. It's also why I avoid these longest maturities.
craigr wrote:
Sun Oct 16, 2016 10:56 pm
MachineGhost wrote:But calculate it for .75%, .5% and .25% yields and it still holds up because the duration is also increasing to make up for the "missing" yields, i.e. it just becomes more like a zero coupon bond. At 0% nominal yields it will definitely be objectively questionable as to any future capital gains. But, worrying about the potential losses on a rise in yields is market timing and I'm going to argue with the way the PP is constructed, you don't want to manage the duration exposure based on what yield levels "should" and "should not" be (because frankly, we'd be all in cash right now which offers no capital loss protection to stocks or gold).
I totally get it.

But each investor has to make their own judgment call on this. At 1% or lower I'm simply not a buyer of long-bonds and I will not likely hold onto them. For people in Europe with yields under 0.50%, they should definitely not be buying them. There is just no juice left vs. the risk.

I couldn't in good conscience tell someone to buy and hold onto long-bonds under 1% in yield. I wouldn't do it myself so I wouldn't recommend someone else to do it.

Again, each person needs to make up their own mind based on the risks they see.
neilk
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Re: PP Europe (Germany)

Post by neilk » Sun Dec 16, 2018 1:23 pm

Thanks for the replies.
Kike Moreno wrote:
Thu Dec 13, 2018 12:55 pm
I think that for bonds the closest you can get to a PP in euros is to buy the longest German bond available, which currently is the one that expires at 2048 and ISIN DE0001102432 (current yield 0.90%). Remember that you get the long bonds not for the yield but for the deflation protection.

If you prefer ETFs they should be long term and high quality, like these:
- Deka Deutsche Boerse EUROGOV Germany 10+ UCITS ETF DE000ETFL219
- iShares eb.rexx Government Germany 10.5+ (ETF) DE000A0D8Q31

If you prefer a mutual fund, this one is an option but it contains lower quality bonds: Vanguard 20+ Year Euro Treasury Index Fund IE00B246KL88

With regard to the cash, if the bank account is in a safe country and the amount is covered by the deposit guarantee limit then I think it's ok.
Do long duration bonds provide deflation protection even when central banks are lapping up govt. debt and basically printing money? From what I've been able to understand, long term bonds go up sharply in value during deflation as interest rates fall. I don't know how much lower interest rates could go in the EU from where they are. Am I missing something here?
europeanwizard wrote:
Sat Dec 15, 2018 1:05 am
Here's an interesting discussion about these lower yields. It's also why I avoid these longest maturities.
craigr wrote:
Sun Oct 16, 2016 10:56 pm
MachineGhost wrote:But calculate it for .75%, .5% and .25% yields and it still holds up because the duration is also increasing to make up for the "missing" yields, i.e. it just becomes more like a zero coupon bond. At 0% nominal yields it will definitely be objectively questionable as to any future capital gains. But, worrying about the potential losses on a rise in yields is market timing and I'm going to argue with the way the PP is constructed, you don't want to manage the duration exposure based on what yield levels "should" and "should not" be (because frankly, we'd be all in cash right now which offers no capital loss protection to stocks or gold).
I totally get it.

But each investor has to make their own judgment call on this. At 1% or lower I'm simply not a buyer of long-bonds and I will not likely hold onto them. For people in Europe with yields under 0.50%, they should definitely not be buying them. There is just no juice left vs. the risk.

I couldn't in good conscience tell someone to buy and hold onto long-bonds under 1% in yield. I wouldn't do it myself so I wouldn't recommend someone else to do it.

Again, each person needs to make up their own mind based on the risks they see.
I see it the same way. The risk is way too much at this point in time. I, too, have already switched to global stocks. Living in the EU, I'm long EU anyway - I am tempted to go for a global bond ETF.
Hal
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Re: PP Europe (Germany)

Post by Hal » Sun Dec 16, 2018 10:13 pm

You may find these papers on currency hedging useful if purchasing foreign shares/bonds

https://personal.vanguard.com/pdf/ISGCMC.pdf

https://institutional.vanguard.com/iam/ ... omain=true

Regards,
Hal
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Re: PP Europe (Germany)

Post by Kike Moreno » Mon Dec 17, 2018 6:15 am

During 2015 and 2016 the 30-year German bund yield went to 0.5% and even below. The current yield is 0.88%, so yes, the yield can still go down and the bund up.

If at 1% you are skipping long bonds, when are you going to buy them? When the yield is at 1.5%? At 2%? At 3%? Maybe then you will think that the yield will continue to go up and you better wait. In any case I think you should have a clear plan that works for you, and follow it.

I prefer to avoid market timing and hold the 4 parts of the portfolio. The rebalancing bands will make me buy and sell at reasonable times.
Harry.Browne
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Re: PP Europe (Germany)

Post by Harry.Browne » Sat Jan 12, 2019 10:34 am

I took this ohne
IE00BSKRJX20 from iShares

No PIGS States
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frugal
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Re: PP Europe (Germany)

Post by frugal » Sun Jan 13, 2019 3:18 am

Hello,

last 5 years EUPP made 18% ?

Please confirm.

Thank you.
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Re: PP Europe (Germany)

Post by johntaylor » Thu Jan 17, 2019 10:43 am

Hello,

I am still fiddling with the results of my first year EU portfolio. On bonds I had 50% exx6 (2018 return:6.1%) and 50% e20y (2018 return 4.2%). I compared the results with the returns for german LT bonds (2018 returns between 9-11%). I am rather puzzled over this big difference in the results. So I used some more data (close values of every month) and presented them in a few graphs and like them to share with you. After three years the cagr of the two german bonds get nearly the same, although there was an big difference in the beginning. Behavior of e20y looks quite similar to the german bonds. First half e20y is slightly higher and last half slightly lower then the german bonds. exx6 is much more different then all the other three, all three years cagr is getting lower compared to the others. I think the different behavior of exx6 can be explained by the fact that exx6 contains more median term then long term bonds while e20y contain all 20+year bonds. I now consider changing my exx6 etf for real german bonds. I found a broker (degiro) which offers them in my country.

IE00BSKRJX20 E20Y etf
DE000A0D8Q31 EXX6 etf
DE0001135366 german LT Bonds 08/40
DE0001102341 german LT Bonds 14/46

Image
PM. I changed the prices in the data I got by calculating adjusted prices with the dividend/kupon each fund offers conform this recipe:
https://joshschertz.com/2016/08/27/Vect ... th-Python/
The cagr is calculated on year base and referenced to 2016-1-1
During 2015 and 2016 the 30-year German bund yield went to 0.5% and even below. The current yield is 0.88%
I presume what you call 'yield' is called 'rendite' at the bundesbank. I don't understand how this 'rendite' is exactly calculated, maybe someone can explain ? I understand it is different then 'Kupon' which is (as I understand correctly) a fixed rate every year independent of the price of a bond. Please correct me if I am wrong.

[Update]Jan 23, 2019 12:19: I changed term 'yield' by 'return'
[update]Jan 25, 2019. Replaced the charts with updated ones
Last edited by johntaylor on Thu Jan 24, 2019 8:40 pm, edited 6 times in total.
neilk
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Re: PP Europe (Germany)

Post by neilk » Tue Jan 22, 2019 5:50 am

Thanks for all the Input on this.

I, quite honestly, still do not know how to implement the bond portion of the portfolio considering the free money policy and deliberate market distortion still being pursued by central banks. Given this fact, I've done the following for the bond portion:

10% LT (10+) German govt. bonds LU0444607005
10% US Treasuries (all maturities) LU0429459356
5% Japanese govt. bonds (all maturities) LU0952581584

I am quite painfully aware of the currency risk, but I guess from the above composition, at least some portion should be doing OK.
Kike Moreno wrote:
Mon Dec 17, 2018 6:15 am
During 2015 and 2016 the 30-year German bund yield went to 0.5% and even below. The current yield is 0.88%, so yes, the yield can still go down and the bund up.

If at 1% you are skipping long bonds, when are you going to buy them? When the yield is at 1.5%? At 2%? At 3%? Maybe then you will think that the yield will continue to go up and you better wait. In any case I think you should have a clear plan that works for you, and follow it.

I prefer to avoid market timing and hold the 4 parts of the portfolio. The rebalancing bands will make me buy and sell at reasonable times.
You're right. I should avoid even trying to time the market - no idea to what extent the ECB will go to save the Euro and prop up growth.
johntaylor wrote:
Thu Jan 17, 2019 10:43 am
During 2015 and 2016 the 30-year German bund yield went to 0.5% and even below. The current yield is 0.88%
I presume what you call 'yield' is called 'rendite' at the bundesbank. I don't understand how this 'rendite' is exactly calculated, maybe someone can explain ? I understand it is different then 'Kupon' which is (as I understand correctly) a fixed rate every year independent of the price of a bond. Please correct me if I am wrong.
Yep, "Rendite" is the current yield. "Kupon" is the coupon - regular payment. I certainly hope the Bundesbank calculates the current yield like the rest of the world does.
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Re: PP Europe (Germany)

Post by johntaylor » Tue Jan 22, 2019 4:05 pm

neilk wrote:
Tue Jan 22, 2019 5:50 am
johntaylor wrote:
Thu Jan 17, 2019 10:43 am
During 2015 and 2016 the 30-year German bund yield went to 0.5% and even below. The current yield is 0.88%
I presume what you call 'yield' is called 'rendite' at the bundesbank. I don't understand how this 'rendite' is exactly calculated, maybe someone can explain ? I understand it is different then 'Kupon' which is (as I understand correctly) a fixed rate every year independent of the price of a bond. Please correct me if I am wrong.
Yep, "Rendite" is the current yield. "Kupon" is the coupon - regular payment. I certainly hope the Bundesbank calculates the current yield like the rest of the world does.
Please help me on on how to calculate yield of this german bonds. Example 30yr bond 17/48. DE0001102432.
https://www.deutsche-finanzagentur.de/d ... 001102432/
coupon:1.25%
22-1-2019: rendite:0.86%, kurs/price: 110.06

So let's say startprice of the bonds I bought was E100, then current price is E110.06 and every year interest is (1.25% * E100 =) E1.25
According to https://www.investopedia.com/university ... dbond3.asp :
current yield = annual interest paid / market price = E1.25 / E110.06 = 1.136%

What do I miss ?
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