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Summary

  • Bond investors should take a look at European speculative-grade, junk debt.
  • The European Central Bank could implement quantitative easing.
  • Europe junk bonds have low default rates.
  • Investors should consider global junk bond ETFs with Europe exposure.

By Todd Shriber & Tom Lydon

On Tuesday, Jens Weidmann, a member of the European Central Bank's Governing Council, told reporters that it is not out of the realm of possibility that the ECB will engage in some form of quantitative easing to stimulate Eurozone economies.

Weidmann's remarks come against a backdrop of dwindling supply of European high-yield bonds, with some market observers saying issuance will decline further before it rebounds. Add to that, default rates on European junk bonds are falling. Bloomberg reported, citing Moody's:

Junk bond defaults in the region are poised to tumble to 1.6 percent by December from 3.5 percent last month as U.S. defaults climb to 2.3 percent from 1.6 percent over the same period.

Combined, the aforementioned scenarios could spell opportunity with European high-yield debt and the exchange traded funds that feature high allocations to those bonds.

The $134 million iShares Global ex USD High Yield Corporate Bond ETF (BATS:HYXU) is one idea. Although not an explicit Europe play, HYXU, which celebrates its second anniversary next week, features just one non-European nation (Canada) among its top-10 country weights.

With Eurozone nations representing eight of the other nine top-10 country allocations and France, Italy and the Netherlands combining for 39% of the ETF's weight, HYXU is levered to decreasing default rates and dwindling supply of European junk bonds.

As is the $158.7 million Market Vectors International High Yield Bond ETF (NYSEARCA:IHY). Although IHY's top-five country weights, a combined 44% of the ETF's weight, are European nations, the ETF also offers exposure to seven emerging. IHY's holdings are denominate primarily in dollars and euro with some Canadian dollar and British pound holdings sprinkled in.

IHY features a 4.57% 30-day SEC yield with a yield to worst of 5.19% and an effective duration of 3.5 years, according to Market Vectors data.

A new entrant to the global high-yield bond ETF fray merits consideration as well. The SPDR International High Yield Bond ETF (NYSEARCA:IJNK) debuted earlier this month. While the U.S. remains dominant issuer of high-yield corporate bonds, foreign issuers are increasing their presence. For example Europe's junk bond issuance more than doubled to over $76 billion last year.

IJNK offers ample exposure to that theme as Italy, the U.K., France and Germany combine for over 44% of the new ETF's weight. Like IHY, IJNK features some emerging markets exposure, but Luxembourg, Spain, Portugal and the Netherlands are also found in the ETF's top-10 country weights. IJNK has a modified adjusted duration of 3.62 years and a yield to maturity of 5.38%, according to State Street data.

iShares Global ex USD High Yield Corporate Bond ETF

(click to enlarge)

Source: Thriving European Junk Market Could Lift These ETFs