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.

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Thus a look at Germany may give us a hint as to long term Euro Zone investment outlook. In Germany’s favor are a highly skilled labor force and strong cultural work ethic. The nation is a leader in exports of complex machinery, chemical, equipment and vehicles. A drawback for Germany as well as much of the EU is demographic. Germany has a low fertility rate and immigration is slowing down. Thus the nation is becoming top heavy with retirees and seeing increased pressure on its social welfare system. Also Germany is often seen as the “paymaster of Europe” as its largest economy. This can become a drag on the German economy as the Euro Zone increases its lending limit again .

Although Germany is commonly thought of as an exporter of goods, such as the Mercedes Benz and BMW, its economy is heavily weighted to services at 71% versus 28.1% industry according to 2010 figures. The nation has forty-three million workers as of 2011. However, the demographic demon may be a problem here as more and more Germans take well deserved retirement. There is an employment reserve among the unemployed with an unemployment rate that stand at around seven percent. The ability of the vaunted German industrial machine to find, train, and retain skilled workers may be critical for the German subset of the long term Euro Zone investment outlook. Over time the best stock investing tips for German companies may have to do with company by company technical and fundamental analysis and not with German stock indexes.

Long term Euro Zone investment outlook outside of Germany runs from lukewarm to frightening. Spain is dealing with twenty-five percent unemployment and Greece expects to see a shrinking economy as it suffers from severe austerity measures imposed as a price for the latest debt rescue. The Greek financial collapse was averted at the last minute but the fact that the EU is already increasing its lending limits has many concerned that a year or so from now the Euro Zone will at risk, again, of a domino effect series of financial defaults. As usual we are not suggesting investment in Europe or that an should investor avoid opportunity on the continent. Rather we offer this discourse as an example of thinking through possible investments over the long term.

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