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Are Euro Bonds Attractive Again?

While European leaders today vowed not to force losses on bondholders in any future bailout deals for struggling countries, advisers remain wary of the Continent’s bond market.

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The agreement to shield bondholders from any more unflattering “haircuts” is primarily designed to benefit European banks, says Jamie Cox, a managing partner at Harris Financial Group. “Banks in Europe are heavy holders of sovereign debt of the euro zone countries,” Cox says. A major bank failure was a real risk, and this week’s moves from European leaders and the European Central Bank have at least taken the risk of a “Lehman moment” crisis off the table, he says. But the moves do little more than make it possible for banks to continue holding the bonds they already own to maturity, he says. “It’s not a buying opportunity, it just removes the reason to sell for European banks,” Cox says.

Taking bondholder losses off the table solves a short-term problem, but in the long term it may make other problems worse, says Paul Nolte, the managing director of Dearborn Partners, an advisory firm. “Somebody has to hold the bag here,” Nolte says. If not bondholders, it’ll likely be European taxpayers, and forcing them to bear the burden of the crisis may make Europe’s impending recession worse, he says.

To be sure, there may be great values in European stocks or European corporate bonds, says Ron Weiner, the president and CEO of RDM Financial Group, but “in Europe they’re trying things that have never been tried before, so the risk is significant.” Investors can find better investments in the United States, he adds, including financially healthy multinationals like McDonald’s or Caterpillar, and oil and gas pipelines that throw off high, sustainable yields, Weiner says.

Despite this week’s European summit, advisers are still in wait-and-see mode. “I think the developed nations of Europe will look very different five years from now than they look today,” says Kevin Mahn, the chief investment officer at Hennion & Walsh. “We’re going to stay clear of that area until the dust settles,” Mahn says.


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