The aggressive European Central Bank bond-purchasing program has stifled yields across the region, potentially supporting high-yield European bonds, along with related exchange traded funds.
While there are no U.S.-listed Europe region-specific bond ETFs available, investors can still gain exposure to the area’s high-yield bond market through international bond ETFs. For instance, the Market Vectors International High Yield Bond ETF (NYSEArca: IHY) includes 37.3% in euro-denominated bonds and 8.7% in British pound-denominated debt, iShares Global ex USD High Yield Corporate Bond ETF (NYSEArca: HYXU) includes a 89.4% exposure to European countries and SPDR Barclays International High Yield Bond ETF (NYSE: IJNK) holds 71.1% European bonds.
The high-yield bond ETFs also come with attractive income opportunities. IHY shows a 6.2% 30-day SEC yield, HYXU has a 4.68% 30-day SEC yield and IJNK has a 4.75% 30-day SEC yield.
“Europe has one very strong technical factor in its favour right now and that is the massive amount of stimulus the European Central Bank is pumping into the economy, while in the US the Federal Reserve remains committed to its pledge of raising interest rates this year,” Mike Kessler, a European credit strategist at Barclays, said in a Financial Times article.
The loose monetary policies have pushed down yields across Europe, with government and now some private sector bond yields trading in negative territory. Consequently, fixed-income investors are shifting down quality in an attempt to maintain yields. [ETF Options to Capitalize on a Yield-Starved Europe]
The European high-yield market is in the midst of a boom as bond issuance in the region surged in the past couple of years due to loosening bank lending practices. European debt issues are of slightly higher quality, coming in at a Ba2/Ba3 rating, compared to the B1/B2 rating for the U.S. index.
Additionally, while the U.S. junk bond market reeled in response to its large 15% exposure to the energy sector and sudden plunge in oil prices, less than 1% of high-yield European bonds are exposed to energy companies.
“A lot of investors are willing to bypass the lower liquidity of European markets in exchange for higher ratings and less exposure to oil prices,” Sabur Moini, a high-yield portfolio manager at Payden & Rygel, said in the FT article.
For more information on the Eurozone, visit our Europe category.
Max Chen contributed to this article.