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A Warning on the Rally in Europe Bonds, ETFs

The run-up in Eurozone debt and bonds-related exchange traded funds could begin to flag as BlueBay and BlackRock sound a warning on a continued rally in Europe’s fixed-income market.

With investors clamoring for income opportunities, bonds yields of Ireland, Italy and Spain have been significantly pushed down. For instance, Italian 30-year yeilds fell below 4% for the first time since 2006, Portugal’s spread over German bunds narrowed to a four-year low, Bloomberg reports.

BlueBay warned that the rally in Eurozone bonds is being fueled by an overly optimistic outlook that the European Central Bank will begin quantitative easing.

“Markets have clearly moved to expect a rate cut as a minimum at the June meeting,” Mark Dowding, a money manager at BlueBay, said in the article. “The burden of proof is in the data and Draghi may find it difficult to deliver in June. The market is getting ahead of itself. The sense in the periphery is that we’ve now seen the vast majority of the spread tightening that we’re looking for.”

Scott Thiel, head of European and global bonds at BlackRock’s London branch, also cautioned that the ECB is unlikely extend stimulus measures.

“In the European periphery we remain invested in Portuguese and Slovenian government bonds,” Thiel said in a note. “However, given their significant spread compression to German bund yields in recent weeks and in light of excessive market expectations for imminent quantitative easing in the euro zone, we have reduced these positions.”

Investors have jumped into high-yield international bond ETFs to gain exposure to Eurozone debt. For instance, the Market Vectors International High Yield Bond ETF (IHY) includes a 10.3% exposure to U.K., 9.2% to France and 9.7% to Italy. IHY has a 0.40% expense ratio and a 4.47% 30-day SEC yield. [Not so Junky European Junk Bond ETFs]

The SPDR International High Yield Bond ETF (IJNK) top European country weights include Italy 13.6%, U.K. 10.5% and France 11.5%. IJNK has a 0.40% expense ratio and a 4.19% 30-day SEC yield. [ETF Spotlight: International Junk Bonds]

Top country holdings in the iShares Global ex USD High Yield Corporate Bond ETF (HYXU) include France 14.2%, Italy 14.3% and Luxembourg 13.4%. HYXU has a 0.40% expense ratio and a 3.02% 30-day SEC yield.

For more information on the Eurozone, visit our Europe category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.