Last week, European Central Bank President Mario Draghi gave his most overt hints to date that the ECB is mulling some form of quantitative easing.
ECB easing, assuming it happens, would arrive under the guise of bolstering the Eurozone economy, but with the euro viewed as one of the most overvalued developed market currencies in the world, it is not a reach to say the central bank is looking to help export-driven nations, including Germany, by possibly forcing the value of the euro lower. The CurrencyShares Euro Currency Trust (FXE) is up 5.2% in the past year. [Central Banks Could Impact Euro]
It could pay to not get too excited about any action by the ECB.
“ECB actions may turn out to be belatedly insufficient to forestall abating price pressures (disinflation) from transitioning to declining living costs (deflation) in which households are encouraged to save, rather than spend, in anticipation of further decreases in the prices of goods and services–thereby depressing domestic demand, discouraging capital spending, and debilitating aggregate economic activity akin to what the Japanese economy has experienced for the past two decades. Descending core euro-land 10-year sovereign debt yields, apparent in a widening gap vis-a-vis U.S. Treasuries of the same duration, confirm intensifying market concerns about the prospect for eurozone deflation,” said S&P Capital IQ in a research note.
The ECB next meets on May 8 and investors can prepare for the possibility of bond buying by the central bank with a pair of bond ETFs, including the PowerShares International Corporate Bond Portfolio (PICB) . PICB, home to $220.7 million in assets under management, is rated marketweight by S&P Capital IQ.
The ETF holds investment-grade corporate bonds denominated in the G-10 currencies, including the euro. In terms of exposure to action by the ECB, PICB features five Eurozone countries – France, Germany, Italy, the Netherlands and Spain – among its top-10 country weights. Those nations combine for about 48% of the ETF’s weight. PICB has a 30-day SEC yield of 2.03% percent and an effective duration of 5.59% years, according to PowerShares data.
Another fixed income ETF to consider is the $284.6 million SPDR Barclays International Corporate Bond ETF (IBND) . IBND is also rated marketweight by S&P Capital IQ. IBND offers exposure to six Eurozone nations with France and Germany combining for nearly 28% of the ETF’s weight. [Investors Eye Corporate Bond ETFs Again]
IBND, home to nearly 540 issues, has a 30-day SEC yield of 1.19% and a modified adjusted duration of 4.97 years.
“If the ECB were to implement a quantitative fixed-income purchasing program targeting government bonds, eurozone sovereign issuance of intermediate and long-term duration would probably benefit the most — warranting an overemphasis in debt and mixed asset portfolios. On the other hand, in the event the monetary authorities were to focus their purchases on corporate bonds in lieu of government issuance, investors should overweight the former of intermediate and long-term duration. If, however, the central bank were to target both government and corporate debt, overemphasizing holdings of both fixed income sectors of the same duration would be recommended,” said S&P Capital IQ.