German Bonds

[happyspec]

I think about setting up a German based PP. As you all know we have a crisis in the Euro zone and I wonder whether it is a good idea to buy German long term bonds. Now the German economy is by far the strongest in the Euro zone but I'm afraid that politics will worsen the situation when European countries should default. What if the German taxpayer has to go all in to bail other countries out? In my opinion yields for German bonds would skyrocket, the prices of these bonds would crater. And if so what bonds should a German PP-guy buy then? Would appreciate to know what you think...

[AdamA]

I think about setting up a German based PP. As you all know we have a crisis in the Euro zone and I wonder whether it is a good idea to buy German long term bonds. Now the German economy is by far the strongest in the Euro zone but I'm afraid that politics will worsen the situation when European countries should default. What if the German taxpayer has to go all in to bail other countries out? In my opinion yields for German bonds would skyrocket, the prices of these bonds would crater. And if so what bonds should a German PP-guy buy then? Would appreciate to know what you think...

That's a good question. 

On another thread somewhere on this board, I remember someone recommending (to a Canadian investor) that they might consider splitting their bonds between Canadian and US long term bonds, so you might consider doing the same.

Curious to hear what others think.

[frommi]

German bonds are currently the safest in the eurozone. For a euro PP as a german this is the only viable option.
You can choose netherland or switzerland bonds, but you have other risks then. (for example when the eurozone breaks and the DM is reintroduced.)

[frugal]

Juergen

Yes right.

Direct or ETF?

[happyspec]

Thank you very much for your answers. Now I'm fully aware that Germany currently is the most secure place in the EU for buying government bonds. The point I wanted to make is: Unlike the United States the creditworthiness of Germany may depend on factors that this country can't control - e.g. a breakdown of a country in the Euro zone. Until now there are obviously no sorrows about the ability of Germany to pay the money back: 30-year bonds yield 2,4 % p.a. and I will buy them directly into my brokerage account. But this could change someday and my thinking was therefore, as AdamA mentioned, to split between German and U.S. bonds and hedge the currency risk. So I would buy the two biggest bond markets in the world and reduce the consequences that would come with a meltdown in the EU buy half. But I'm not sure whether this is a good idea as the hedging would eat into the yield. Perhaps I just try to anticipate the future too much and I should load up the PP with bonds made in Germany 

[frugal]

Thank you very much for your answers. Now I'm fully aware that Germany currently is the most secure place in the EU for buying government bonds. The point I wanted to make is: Unlike the United States the creditworthiness of Germany may depend on factors that this country can't control - e.g. a breakdown of a country in the Euro zone. Until now there are obviously no sorrows about the ability of Germany to pay the money back: 30-year bonds yield 2,4 % p.a. and I will buy them directly into my brokerage account. But this could change someday and my thinking was therefore, as AdamA mentioned, to split between German and U.S. bonds and hedge the currency risk. So I would buy the two biggest bond markets in the world and reduce the consequences that would come with a meltdown in the EU buy half. But I'm not sure whether this is a good idea as the hedging would eat into the yield. Perhaps I just try to anticipate the future too much and I should load up the PP with bonds made in Germany 

You can setup in a drawdown


Do it

[moda0306]

I haven't scanned this whole thread, but my biggest fear with any Euro-based bond is that the Euro is essentially the worst of both worlds from an investor's perspective (after being trained in the fine arts of Macro-investing a la the PP).

Euro based bonds will not neary as reliably perform like US or Japan bonds in a deflationary period, but always still run the risk of going to $hit on you cuz they are a fiat currency. 

I just don't like investing in something built like the Euro.  At least with the USD and treasury bonds, you've got a relatively good idea what the rules of the game are.

That said, if I lived in Europe, German bonds would be best.

But I'd probably feel the need to throw in some sovereign fiat currency bonds in there as well... some US and Japan and others would probably be not too bad of an idea.

[frugal]

I haven't scanned this whole thread, but my biggest fear with any Euro-based bond is that the Euro is essentially the worst of both worlds from an investor's perspective (after being trained in the fine arts of Macro-investing a la the PP).

Euro based bonds will not neary as reliably perform like US or Japan bonds in a deflationary period, but always still run the risk of going to $hit on you cuz they are a fiat currency. 

I just don't like investing in something built like the Euro.  At least with the USD and treasury bonds, you've got a relatively good idea what the rules of the game are.

That said, if I lived in Europe, German bonds would be best.

But I'd probably feel the need to throw in some sovereign fiat currency bonds in there as well... some US and Japan and others would probably be not too bad of an idea.

what is the problem of EURO?

Marc de Messel prooved that EU PP had same performance!


regards

[koekebakker]

For a lot of EU investors euro bonds are a pretty bad deal at the moment. German bonds are probably the only ones that qualify for a PP and their current 30-year yield is 2.3%. 10 year yields are lower than insured savings accounts. Besides that, it's complicated to buy German bonds directly and the long term bond ETF's all have their problems. Until now I've solved this problem by combining long term bonds and cash in an intermediate German/Dutch bond fund but the yield is far lower (especially after all  expenses) than my government-owned and insured Dutch savings account. The savings account is probably safer as well and it yields 1.9%.

All the bond options seem terrible right now so at the moment I'm 50% cash  . I know I won't be as protected against a severe deflation but at the same time, 50% cash should do pretty well in such a scenario. Pick your poison....

[frugal]

your portfolio is not balanced

it seems more dangerous

EU-PP had a good behaviour in the past

[koekebakker]

I agree it's a bit unbalanced, but it's definitely not more dangerous. My stock portion is global so my portfolio is roughly 50/50 eurozone/non-eurozone+gold. I would say it's safer than having 75% of your assets tied to the Eurozone.

I just can't see any way I can invest in eurozone bonds right now. Cash/CD's seems far more attractive.  If you know a solution, enlighten me.
Long-term bond etf's suffer from a lack of transparency, most are income-based, hold Italian/Spanish bonds or are swap-based. I can't find one that I like at least a bit. I could buy US-treasuries but I already have enough foreign currency risk.
My previous solution, an intermediate bond fund, yields far less than a simple savings account so I'm not too thrilled about that either.

I like bonds but until I see a reason to invest in them I'll keep my powder dry. The deflation protection of long-term German bonds has almost run it's course anyway, unless you believe long-term rates can go far lower than 0%... By not holding long-term bonds I might miss one last push towards 0%, but that's it and I'm ok with that. For now I don't see a better way.

[Thomas Hoog]

Well, you have found the weakest point in the EU PP. You just have to choose (out of bad options).
Personally I hold on to the long view, so I need Euopean based LT bonds. Germany is strong now, but you know your own history.
US bonds has 2 weak points, currency and their past performance. Like you, I don't like hedging.
So I have chosen the EFT option; fingers crossed.

[frugal]

EXX6 and other ETF's

Mix it

[zen]

The way I see it 2 things can happen, the politicians will finally stop dragging their feet and do something to fix the Euro or the next time a crisis happens a big member like Italy or Spain will default and drop out of the Euro.
In the first scenario you want to hold a mix of bonds of all the member states (most states will have falling yields, Germany's yields will probably go up). In the second case a Euro breakup seems pretty likely to me, in which case German bonds will be hit hard as well (people will lose confidence in the EU/Euro in general, still driving Germany's yields way up), although the bond mix will be hit even harder of course.
If for some reason things stay like they are now, a bond mix is better because the yield is higher.
Anyway I chose for a bond mix (IBGL), although I can also understand why people would go Germany only.