About Government/Agency Bonds
European Government Bonds
Bonds issued by governments of countries in the European Union and non-Euro European countries (including Germany, Italy, France, the United Kingdom, Spain, Belgium, the Netherlands, Greece, Austria, Denmark, Sweden, Portugal, Finland and Ireland) can help investors diversify their investments and gain exposure to international markets whose business and economic cycles may be at different points than those in the United States. At the end of 2007, European issuers had a higher volume of outstanding government securities than the U.S.Treasury.
Among the issues to consider when investing in international bonds are:
Volume outstanding. The more volume outstanding, the more liquid the market is likely to be. The top three countries in terms of volume outstanding in 2007 were Italy, France, Germany followed by the United Kingdom, Spain and Belgium.
Country credit ratings. Sovereign issuers are assigned credit ratings from Moody’s and Standard & Poor’s, and these can change from time to time. Most European issuers listed above are investment grade, but not all are AAA.
European Central Bank policy. The European Central Bank controls short-term interest rates for countries in the European Union the way the Federal Reserve does in the United States. Historically the ECB has shifted rates later than the Fed and in smaller increments.
The cost of investment. Transaction costs for European bonds can be higher than for U.S. Treasuries.
Currency relationships. The relation of the dollar to the euro will also be a factor in the investor’s returns. When the dollar is strong, the initial investment may be cheaper, but interest payments made in euros will be worth less. When the dollar is weak, the initial investment may be more expensive, but the euro-based interest payments may be worth more. The transaction costs of currency conversion may also reduce total return.
For more information, consult your investment adviser.