Seeking New Safe Havens

 | Dec 13, 2011 | 12:00 PM EST
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This piece originally appeared earlier today on ETF Profits.

Though news on U.S. jobs and corporate earnings has made headlines in recent days, the reality remains that all eyes are still on Europe, and the progress -- or lack thereof -- made by the cash-strapped continent over the next six months will make or break the fortunes of global stock markets. Like it or not (and most of us don't), we're living in a world where advisors and hedge fund managers are rising in the middle of the night to check the news from Europe. Most likely, it's going to stay that way for the foreseeable future.

There's been much talk about the weakest links in the rapidly-eroding euro chain -- the so-called PIIGS nations (Portugal, Ireland, Italy, Greece and Spain) that seemingly hold the fate of global financial markets in their hands. If they get their fiscal houses in order, markets could thrive. If they head for bankruptcy, it could become a worldwide financial nightmare. At the other end of the spectrum are the "bright spots" of Europe, markets that we have been led to believe are relatively immune from the woes plaguing their neighbors and positioned to come through the recent struggles relatively unscathed.

German bonds, for example, have become a safe haven in recent months, standing out as a safe place to park cash when risk aversion spikes. But I'm not sold on Germany -- or any other European market for that matter -- as a safe location in this storm. Ten-year German bonds are currently yielding just north of 2% a paltry yield that will not, realistically, even keep up with inflation. The appeal of German bonds has resulted primarily from investor disgust with the alternatives. Investors have sold off Italian and Spanish Treasuries in droves, pushing yields up to record levels. But I'm just not comfortable with the idea of investing in "the lesser of two debtors," especially when there are better alternatives available elsewhere.

Rumor has it that Wall Street is sharply divided on the outlook for German bonds, with Goldman Sachs and Credit Suisse expecting a decline, while JPMorgan and UBS expect this asset class to continue to rally. I'm in the Goldman and Credit Suisse camp because I don't see the appeal in investing in debt of a country that is both running at a pretty hefty deficit and has been unfairly tasked with shouldering the burden heaped upon it by its less fiscally responsible neighbors. That's like buying the decades old Geo Metro because it looks not-so-shabby next to the Yugo. Sometimes, it's best just to stay away.

I'm not of the belief that German bonds should be avoided at all costs, but I am convinced that the return being offered to take on the risk profile is way out-of-whack; Germany is strong next to the fiscal weaklings of Europe, but it's far from a risk-free investment.

For those looking to diversify their fixed-income portfolios, I'd recommend trying some other, more fiscally stable destinations. Australian and New Zealand bonds, accessible through WisdomTree Australia & NZ Debt (AUNZ), are appealing. Those debt securities offer a more attractive yield that is backed by stronger currencies and markets that feature less credit risk. AUNZ currently has a 30-day SEC yield of about 3.7%.

Another nice choice is Chinese bonds; the Dim Sum market is a place to get some reasonable yields with little downside currency risk, credit risk or interest rate risk. PowerShares Chinese Yuan Dim Sum Bond (DSUM) and Guggenheim Yuan Bond (RMB) both offer interesting opportunities in this corner of the market. Canada offers more appealing funds. The often-overlooked yet always stable economy to our north is backed by massive reserves of natural resources. PIMCO Canada Bond Index ETF (CAD), a new addition to the ETF lineup from PIMCO, represents a much more effective safe haven that funds such as PIMCO Germany Bond Index ETF (BUND) and PowerShares DB German Bund ETN (BUNL).



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