Euro Denominated Bonds

Is now the time to invest in Euro denominated bonds? Interest rates are high in countries like Italy due to the Euro debt crisis. If all of this gets resolved successfully interest rates will likely drop. Those holding Euro denominated bonds paying 7% interest will see a windfall. Couple the benefits of falling interest rates on Euro denominated bonds with a rebounding Euro and the profits are further enhanced. To profit from a resolution of the European sovereign debt dilemma will take timing and, perhaps, patience. To profit from anticipation of the fix to debt problem will require attention to Forex fundamentals as well as technical analysis of price patterns.

The background to this situation is that a number of nations in the European Union developed severe budget deficits after the 2008 market crash and onset of the worst recession in 75 years. The so called PIIGS group (Portugal, Italy, Ireland, Greece, and Spain) has required financial support from the European Community in general and from the International Monetary Fund and European Central Bank in particular. In return the bankers and other lenders have demanded austerity measures in order to reduce national budgets. This has led the fall of governments in Greece and Italy with veteran politicians being replaced with leaders likely to control spending. Because lenders require higher interest rates for risky situations they have bid up interest rates on Euro denominated bonds in Greece, Italy, Spain, Portugal and elsewhere. Anyone not in the EU has had to use the Forex market to change US dollars, Yen, British Pounds, or other currencies into Euro in order to purchase these bonds.

After a painful year or two of chaotic markets and mental anguish it appears that EU leaders are finally getting their act together. In a recent financial summit leaders agreed to EU treaty changes that will further integrate finances across the board in the EU. The intent is to reduce the ability of local politicians to win votes by spending money that they do not have. The profit in this situation is that the Euro has taken its hits over the last couple of years and will likely rebound strongly when a winning system is in place. At the same time lenders will be willing to accept lower rates for Greek, Italian, and other Euro denominated bonds.

The market value of a bond is determined by calculating the total of payments remaining and comparing to payments available for bonds issued at the current interest rate. When interest rates fall prices of old bonds go up. Thus Euro denominated bonds issued with a 7% interest rate will be substantially more valuable if interest rates fall to 6, 5, or 4 %. Couple that with the fact that the Euro has varied in trading by a factor of two against other major currencies over the last decade. In order to profit from investing in, and selling, Euro denominated bonds, currency traders need to pick the most opportune time to enter the Forex market and the most opportune time to purchase bonds. Then, when the European situation improves, the investor will need to pick the right time to sell his Euro denominated bonds and convert his now-highly-priced Euros back into Yen, US dollars, or British Pounds.