Short Term Euro Storage

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Hyperborea
Posts: 956
Joined: Sat Apr 15, 2017 10:31 am
Location: Portugal

Short Term Euro Storage

Post by Hyperborea »

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.
It’s not just that facts don’t seem to matter anymore. It’s that it doesn’t seem to matter that facts don’t matter.
Valuethinker
Posts: 49030
Joined: Fri May 11, 2007 11:07 am

Re: Short Term Euro Storage

Post by Valuethinker »

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.
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tre3sori
Posts: 460
Joined: Wed Jul 24, 2019 3:13 am

Re: Short Term Euro Storage

Post by tre3sori »

A relative of mine had a similar question of where to store 100+K Euros for a short term (up to 5 yrs).
I showed her this graph:
Image

Blue: iShares € Corp Bond ex-Financials 1-5yr UCITS ETF,
Green: iShares Euro Corporate Bond 1-5yr UCITS ETF,
Red: iShares eb.rexx® Money Market UCITS ETF,
Black: iShares Core € Govt Bond UCITS ETF

So a corporate short term bond fund like iShares € Corp Bond ex-Financials 1-5yr UCITS ETF may also fit your needs if you can live with a bit more volatility than a short term EUR government bond fund with negative yields.
The information provided is intended to be entertaining. It is not to be construed as professional advice. Use it at your own risk.
wmvink
Posts: 101
Joined: Sat Apr 13, 2013 12:44 am

Re: Short Term Euro Storage

Post by wmvink »

It looks like you're currently based in Japan but if you also have exposure to the IRS, then please note foreign bond funds are considered PFICs.
halfnine
Posts: 2421
Joined: Tue Dec 21, 2010 12:48 pm

Re: Short Term Euro Storage

Post by halfnine »

Valuethinker wrote: Tue May 11, 2021 7:05 am
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.
+1

I'd see what you could find with a 1 or 2 year term deposit with the caveats listed above. And just keep less than 100K with IB as well.
Stork
Posts: 175
Joined: Wed Feb 17, 2021 9:44 am
Location: Portugal (EU)

Re: Short Term Euro Storage

Post by Stork »

You can see if you find any deposit account at raisin.com - I consider an Austrian or a Czeck bank, both countries have decent credit ratings. (AA+ and AA- AFAIR)
User avatar
Topic Author
Hyperborea
Posts: 956
Joined: Sat Apr 15, 2017 10:31 am
Location: Portugal

Re: Short Term Euro Storage

Post by Hyperborea »

Thanks to all for the information and feedback.
wmvink wrote: Tue May 11, 2021 8:28 am It looks like you're currently based in Japan but if you also have exposure to the IRS, then please note foreign bond funds are considered PFICs.
I used to but not anymore. My ties to the IRS are only on what assets are based in the US.

halfnine wrote: Tue May 11, 2021 3:21 pm I'd see what you could find with a 1 or 2 year term deposit with the caveats listed above. And just keep less than 100K with IB as well.
That's what I was thinking at one time but I couldn't find any.

Stork wrote: Wed May 12, 2021 9:44 am You can see if you find any deposit account at raisin.com - I consider an Austrian or a Czeck bank, both countries have decent credit ratings. (AA+ and AA- AFAIR)
This looks interesting. For a Japan based investor there are only 3 banks with products listed: J&T Banka (Czech), Euram (Austria), Alior (Poland). I'll look into this further but might see about splitting it between the first two.
It’s not just that facts don’t seem to matter anymore. It’s that it doesn’t seem to matter that facts don’t matter.
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