If You’re Invested In European Bonds, You’re Earning Less And Risking More

If You’re Invested In European Bonds, You’re Earning Less And Risking More
Stéphane Renevier, CFA

about 2 years ago1 min

A bond’s duration is a good measure of its sensitivity to interest rates, and those of European bonds have risen to elevated levels across the board. That’s because years of highly accommodative monetary policy from the region’s central bank has pushed interest rates on debt to the floor, effectively incentivizing companies to issue bonds with ever-longer maturities in order to lock in cheap financing rates.

If you’re a European bond investor, this is a pretty big deal: not only is the yield you’d receive today much lower than it was before, but your exposure to interest rates is higher. Put differently, you’re earning less and risking more.

But there is a way to play this. If you think rates will rise in the region, you might want to think about shorting European bond ETFs (or, if you can’t short them directly, you can short a contract for difference or buy a put option on it). The iShares € High Yield Corp Bond UCITS ETF (ticker: IHYG) could be a great candidate: it has a higher exposure to interest rate risk, while also holding the debt of some of Europe’s riskiest companies. So if interest rate hikes end up proving destructive, it could be a winner on both fronts.



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