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Trading Euro Zone Bonds
Despite promising news from Greece, the Euro Zone debt crisis continues to worsen. Spain’s ten year note now carries a seven percent yield. Monetary experts are saying that Spain may be the next nation to need substantial European Central Bank Loans as part of an official bailout package. In the meantime Euro Zone bonds in nations such as Italy, Spain, Portugal, Greece, and Ireland offer high yields. Of course trading Euro Zone bonds of the high yield variety comes with higher risk as well. Private investors had to take write-downs in the values of their investments in order for the most recent Greek bailout to go forward. And, if the situation worsens, anyone holding Italian, Greek, or Spanish bonds could end up losing their investment capital. However, trading Euro Zone bonds may be a bit like trading junk bonds. Junk bonds are also called non-investment grade bonds and the degree of risk involved is priced into the bond. Junk bond portfolios often outperform investment grade bonds but they need to be well diversified in order to avoid having one bad investment take out all of one’s investment capital. Trading Euro Zone bonds, however, takes a different strategy. Traders are looking for interest rate changes.
The chart shows current ten year bond yields for a few countries. If you are investing in these bonds you will only take Greek ten year bonds for a huge discount, 26.3%. On the other hand, bonds from France, the USA, and Germany are considered very safe and only offer 2.61%, 1.58% and 1.41% yields respectively. Italy and Spain fall into a middle ground with substantially less risk than Greece but a larger profit potential than the USA, France, or Germany. Spain offers a 7.19% yield on ten year debt and Italy 6.08%. The question for those trading Euro Zone bonds is how Euro Zone and local economic policy and politics will affect interest rates. The situation in Greece has gotten so bad that investors are happy just to see the country put a new government in power with the faint hope that they will lead the country through its seemingly eternal recession with an exit from the Euro Zone. The value for trading Euro Zone bonds at this time is that the market seems to jump at every little piece of news. Although the German bond might not move much, those of Greece, Spain, or Italy could correct. If any of those bonds see lower interest rates their values could rise substantially. Considering the volatility of the market many traders are more comfortable with technical analysis of market sentiment than they are of any attempt to understand the fundamentals. The point after all of trading Euro Zone bonds is to get in at high interest rates and sell on a fall in rates. If things stabilize in the Euro Zone, traders could see a series of profitable opportunities with falling interest rates.