The European Central Bank bond-purchasing program could ignite a rally in the Eurozone fixed-income markets and related bond exchange traded funds.
Speculation on monetary policies has helped Germany- and Italy-specific bond exchange traded notes strengthen over the past year. For instance, the PowerShares DB German Bond Futures ETN (NYSE Arca: BUNL) increased 15.3% over the past year and the leveraged PowerShares DB 3x German Bond Futures ETN (NYSE Arca: BUNT) jumped 52.4%. Meanwhile, the leveraged PowerShares DB 3x Italian Treasury Bond Futures ETN (NYSEArca: ITLT) surged 69.2% and the PowerShares DB Italian Treasury Bond Futures ETN (NYSEArca: ITLY) increased 17.8%.
However, investors should be aware that these country-specific bond ETNs are relatively small and show sparse daily volumes, so people should use limit orders to better control trade executions. Additionally, if the Italy bond ETNs gained more investment interest, the ETNs could come up against creation limits, which could widen premiums and discounts to underlying net asset value. [Creations Stopped in Two Italy Bond ETNs]
Potentially fueling gains in European bonds, ECB president Mario Draghi and the executive board have proposed a 50 billion euro monthly bond purchase program through December 2016, Bloomberg reports.
Bond rates across the Eurozone have been sliding ever since Draghi pledged to do whatever it takes to save the euro currency. For instance, the average yield on Eurozone government debt dipped to 0.7017% January 19, the least since at least 1995 – yields and bond prices have an inverse relationship, so a falling yield corresponds with rising bond prices.
As an alternative option the country-specific ETNs, investors can gain European bond exposure through broader international fixed-income ETFs. For example, the SPDR Barclays International Treasury Bond ETF (NYSEArca: BWX) includes U.K. 7.9%, Italy 6.3%, France 6.2%, Germany 5.1%, Belgium 4.5%, Spain 4.4%, Netherlands 4.4% and Austria 3.5%, among others. The iShares International Treasury Bond ETF (NYSEArca: IGOV) includes Italy 6.9%, France 6.7%, U.K. 5.9%, Germany 5.8%, Belgium 4.6%, Ireland 4.6%, Spain 4.5%, Austria 4.5% and Portugal 4.4%.
Additionally, the Vanguard Total International Bond ETF (NYSEArca: BNDX) provides broad exposure to international debt, including foreign investment-grade government, corporate and securitized debt while hedging currency exposure, which can diminish volatility attributed to the Forex risks. BNDX also includes a 57.6% tilt toward European countries.
For more information on Europe, visit our Europe category.
Max Chen contributed to this article.