Cutting the Eurozone bank rate has made the single currency bonds worse value than ever, according to fund managers.
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Investment advisers are warning clients that Eurozone bonds are now offering poorer returns than UK and US government debt – especially those from countries gripped in financial crisis, like Spain and Ireland.
One fund manager, Bryn Jones, fixed income director at Rathbone Unit Trust Management, describes investing in Eurozone bonds as ‘playing with nitro-glycerine’ as the deal is likely to blow up without warning.
Scott Thiel, global head of fixed income at BlackRock explained he had reduced exposure to bonds from Portugal, Ireland, Italy, Greece and Spain to the lowest level for almost three years.
The worry for fund managers is the -0.1% rate that European banks now pay to savers.
Don’t save – spend
The European Central Bank is sending a clear message – spend, don’t save to stimulate the economy back into growth.
The negative rate means savers are paying the banks interest for keeping their money instead of earning cash on savings.
Stephen O’Hanlon, manager of the ACPI Global Fixed Income fund, explained that many fund managers felt the message the ECB was sending was contrary to what bank president Mario Draghi spelt out last year.
Draghi famously said the ECB would do whatever it takes to ensure the stability of the Eurozone – providing countries in financial trouble reformed their economies.
“The trouble is we see little reform but help still going to these countries underwritten by Germany,” said O’Hanlon. “If Germany decides to back out, the bonds these countries have issued are worth very little to investors.”
Maker sure to read our guide to living in Ireland for expats.
Bonds at tipping point
Meanwhile, to Gareth Isaac, co-manager of the Schroder Strategic Bond Fund, is warning investors who have enjoyed income from bond yields over recent years can expect the market to shift over the next few months.
In a briefing, he told investors and other fund managers that bond yields were growing smaller and that Eurobonds had narrow margins.
“The returns are likely to come from holding bonds rather than trading,” said Isaac.
“This is a risky way to hold bonds and we believe the market has reached a tipping point that will restrict future returns.”
He also warned against Eurozone bonds – claiming the ECB needed to do more to tackle a drift towards deflation that could make the sovereign debt of many Eurozone nations unsustainable.
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