Time to Buy Europe?

The Wall Street Journal reported that several major European fund managers have already begun increasing their holdings in high-yielding European sovereign debt, including that of Spain and Italy.

Considering the alternatives, this might not be a bad bet; especially now that the ECB has effectively provided a default backstop and is prepared to make unlimited purchases of government debt (bonds) from those countries that are having a tough time peddling their debt goods.

This is by no means a “low-risk” proposition, but buying alongside the ECB and what I am called “semi-smart” money, one might be tempted given the 5+% yield offered on Spanish and Italian bonds. Considering the monetary accommodative environment globally, one may need to fund assets that are outpacing growing inflationary pressures from food, energy and goods.

The U.S. Treasury and German Bund 10 year bonds at 1.69% and 1.50% respectively are a net negative yield if you factor for inflation.

The question obviously remains whether the ECB can sustain and follow through on their plans and more importantly whether the Euro Bloc countries’ budgets and economies will be able to weather a continued slowdown in China and protracted stagnant global growth for perhaps years to come.

Some of the best deals can be had in times of stress and strain (see TARP & Buffet Goldman Bailouts).

As long as countries like Spain and Italy can pay their bills and there is no “modification” of the bond principal like we saw in Greece, it might be worth at least a portion of your portfolio if you are willing to take a little risk and are thirsty for yield.

The ECB and Euro-zone countries have demonstrated their willingness to “make it work.” Things seem hunky-dory at the moment, but I wonder what would happen if the U.S. were to dip back into recession and contraction were to accelerate in Europe.

Just like bonds could come crashing down, equity markets in that scenario could easily take a 10%+ haircut as well.

If I were more of a bond guy, I would explore the shorter term notes and bonds and buy on a dip (I think I would feel more comfortable with those yields closer to 6%).

Is it worth it, will the current yield trough in both the Spanish and Italian bonds be just that (with a move higher) or is the trend stable to lower?

I’m not quite ready to jump in just yet, but instead of chasing yield in some relatively pricey US equities, it might not be a bad idea to at least dip your toe in the Euro-Zone pool…