European corporate bonds are poised to do well in a low-inflation environment that is finally emerging from recession. In contrast, North American bond prices have been hit by fears of looming inflation.
The score card
European government bonds, as tracked by the Barclays Euro Treasury Bond Index, have advanced about 2.5 per cent this year. In contrast, Canadian government bonds have retreated by a similar amount.
The divergence is even larger for corporate debt. The Bloomberg Investment Grade European Corporate Bond Index, which tracks more than 2,500 issues, is up about 6.2 per cent over the past 52 weeks. The comparable Bloomberg Corporate U.S. Bond Index, meanwhile, is down about 1.3 per cent.
Investing in European bonds exposes Canadians to currency risk. This year, the euro has grown stronger, rising more than 10 per cent against the loonie. The rise would boost returns if an investor sold and converted back to Canadian dollars today, but swings can go both ways.
Canadian and U.S. bond prices move in close correlation. The euro zone, however, is nowhere near a homogeneous market when it comes to debt. The price of German government bonds, for example, will dip on fears of inflation, but Italian government bonds are more immune and prices may actually rise as those in Germany fall. This makes geography a more critical factor in choosing European bonds.
There is a limited selection of European corporate bond funds available to Canadians, which restricts the variety of options for a portfolio. Investors may need to consult a financial adviser to access the broadest range of products.
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