With Greece teetering on the edge of default abyss it appears that to invest in Greek bonds was to invest in European junk bonds. Voters have decided in Greece and France that enough is enough. This return to socialism in Europe drives stocks down in the Euro Zone. There is a run on the banks in Greece with depositors asking for their money, all of it. With only a caretaker government in place in Greece there is no one to carry through with the obligations that the former Greek government undertook in order to receive a series of bailouts in the €30 Billion range to prevent default on bond payments. G 8 leaders are meeting shortly at Camp David in an attempt to remedy the debt dilemma that threatens the integrity of the Euro Zone itself. With this background in mind why would anyone want to invest in European junk bonds? By European junk bonds we refer to the high yield bonds of Spain, Italy, and other nations suspected of possibly being unable to satisfy their debt obligations.
A History of Junk Bonds
When considering whether or not to invest in European junk bonds let’s think about how junk bonds got their name and how profitable trading in junk bonds once was. Michael Milken went to prison in 1990 after a plea bargain and agreeing to cooperate with prosecutors in an insider trading, securities fraud and racketeering case. Part of his plea was to never to engage in securities trading again. Prior to that time Mr. Milken made a billion dollars over a four year period in the 1980’s which was by far the highest compensation for a corporate executive. Mr. Milken was influenced by the fact that a sufficiently large collection of high risk bonds was priced in such a way as to make it more profitable to own than investment grade debt. Mr. Milken was largely responsible for trading of high yield bond bonds in which the diversity of the portfolio and high yield of individual bonds protected investors against the likely default of a predictable percentage of debt in the portfolio. With the Milken experience and diligent fundamental analysis in mind investors may well want to consider whether to invest in European junk bonds.
How Many Bonds from How Many Countries?
If one decides to invest in European junk bonds he will want sufficient diversity in his bond portfolio to mimic what Michael Milken did years ago. He will want questionable debt that offers a very high yield. Thus German bonds are out of the question as they are the Euro Zone gold standard and offer a low yield. Spanish bonds are yielding about 6.3% and Italian ten year debt is yielding around just over 6%. German bonds on the other hand are going for 1.4%, the European safe haven for bond investors. As always more than a little investment research is necessary to profit from this sort of situation. But, if you firmly believe that the Euro Zone is not going to fall apart and that Germany, France, and the rest will find a solution it may be time to consider how to profitably invest in European junk bonds. Buy when rates are high and profit when things settle down and rates go lower. As always this is a discussion meant to encourage thinking about profitable investing. We are not recommending that anyone ignore European debt or that they go ahead and invest in European junk bonds.