Hyperborea wrote: ↑Tue May 11, 2021 6:24 am
I'm planning to spend a number of years in Europe starting in about 2 years - waiting for the current situation to clear up. My investment base currency is USD but I have no definite plans of where I will live permanently in the future. As such, the bonds are currently unhedged. I was thinking about putting aside some money from the bond portion of the portfolio into either a Euro bond fund or a Euro hedged bond fund. The money wouldn't cover the entire living costs of the expected time in Europe but would be used if the exchange rates became unfavourable.
There is only one possible choice I can find for the Euro hedged bond fund.
https://www.justetf.com/uk/find-etf.htm ... tOrder=asc
- iShares USD Treasury Bond 1-3yr UCITS ETF EUR Hedged (Acc)
For the Euro based bond fund there are 3 choices if I keep the maturity short.
https://www.justetf.com/uk/find-etf.htm ... 100&bm=0-3
- SPDR Barclays 1-3 Year Euro Government Bond UCITS ETF
- iShares Euro Government Bond 1-3yr UCITS ETF (Acc) or (Dist)
Am I missing any? I don't want to spend a lot on holding the short term bond fund and want it to be short term (so maturity no more than about 3 years). Would I be better off just leaving my bonds unhedged / un-Euro'd? Storing it as cash at IB would bring negative interest rates if more than 100K.
Is this a good idea? I don't know. Really what you want to do is lock in the cost of a home (rental or buy) in Europe when you (return to) Europe? That's a reasonable thing to do.
Safe government bonds in the Eurozone, especially short term ones, have negative yields.
You are better off holding the money in a deposit account in a bank, or some form of term deposit or CD if they offer such and it has a positive interest rate. Make sure you stay within the EUR 100k limit per financial institution AND you are comfortable that the government that stands behind that particular financial institution could afford a bailout.
What is the deposit protection at IB and which government entity provides it?
Example. As I understand it, Revolut, one of the most popular new online banks in the UK, has its banking license via Estonia. And the UK has exited the EU. I am not sure of the status of deposit insurance (£85k limit per institution per customer) that applies in the case of Revolut. Depositors in one of the Icelandic banks got caught in 2008 when it turned out it was, by agreement, the Icelandic government which made up the desposit insurance (then £32k). I believe they eventually got their money, but Iceland, which has a smaller population than a London Borough, was not in a position to fully backstop all depositors to the country's financial institutions.
One of the main flaws in the Euro is the absence of a central mechanism for insuring deposits across all the countries. They have a common currency but they do not have a common financial system.
There are ETFs for global bond funds, hedged into Euros. That would spread your credit risk a bit more. My main thought there is to avoid the concentration in Italy, which is nearly 50% of a Eurozone govt bond fund, from memory? Italy is not free of political or financial risk - the c 2% difference in yields over comparable German bonds tells you that the market thinks, very roughly, that there is a 1 in 50 chance that Italy will default in any given year (the actual calculation is more complex because you'd have to estimate what the market thinks your recovery would be if Italy did default). So we don't need to prognosticate - we have a market view, expressed in the differential in yields.