By Sarah Morgan
As rising yields on government bonds move beyond the euro-zone to France, Austria and the Netherlands, many financial advisers say they’re avoiding the European debt – at least for now.
Indeed, advisers say Europe’s debt woes are accelerating. The much-watched Italian bond yields remain above what many observers describe as the crucial 7% threshold. Spanish 10-year yields are close to a new high, now at about 6.3%. While the yields on Dutch, Finnish, Austrian, and French bonds are still much lower (between 2.4 and 3.6%), they’re creeping up, and the difference between those yields and the German 10-year’s 1.8% is widening. “We aren’t just worrying about contagion — it is happening,” says Steven Roge, a portfolio manager at R.W. Roge & Company.
Given this spreading crisis, many advisers are steering clear of Europe’s bond market. “If you’re a speculator, you might try something, but be prepared to lose money,” says Bob Andres, the chief investment officer at Merion Wealth Partners. Even Germany, he points out, may be too risky: While the country is financially fit, yields there are too low to compensate investors for the risk that it may have to bail out other heavily indebted countries – a move that would push yields up and bond prices down.
To be sure, some see opportunity in all the chaos. And for those brave investors, it is possible to buy high-yielding bonds – either one at a time or as part of a bond fund.
But adviser caution these bets on government bonds are extremely risky. Similarly, European corporate bonds aren’t yielding enough more than U.S. corporate bonds to be worth the risk of fallout from the sovereign debt crisis, says David Sekera, a Morningstar bond strategist.
Other advisers are going even further by avoiding foreign debt altogether. Bob Phillips, a managing partner at Spectrum Management Group, says he sold out of all foreign bond funds in July. Most of these funds have exposure to European debt, and the end result of the European crisis “is really unpredictable,” Phillips says.