Short term (6 months) government bonds / treasury bills of an EU country

[mikegaga]

I want to put my emergency funds (6 months of living costs, assuming a normal lifestyle) into short term government bonds / treasury bills. The idea would be that for 6 months I buy every month a 6-month bond, and 6 months, a bond will run out, and I reinvest the money again in bonds.

I would be happy with any 6 months bond/T-bill of an EU member country, denominated in EUR.

My questions are:

• Does my idea make sense? Is it possible to buy every month cost-effectively?
• Where should I buy? I already have an IBKR brokerage account. Is there any specific possibility in any EU country to buy bonds/T-bills cost effectively? For example, in Hungary it’s possible to open an account at the State Treasury for this, I don’t know if there’s something like this in other countries, and if I can open an account if I am not a citizen and not living there.

I am Hungarian citizen, living in Austria, if that matters.

Thank you for your advice in advance!

 

[jrchristian]

@mikegaga Might be too expensive commisionwise, esp. as they don't trade as cheaply as US treasurys. There's also the question of where to find a constant supply of fresh short-term (or shortly maturing) € sovereign bonds: IBKR choice seems pretty poor to me; other brokers or your bank may offer more, but at higher commissions. I think another important issue to consider is, in a super-crisis scenario, do higher-yielding (aka less creditworthy) EU members (Hungary, Romania, Croatia, etc.) default before or after a money market fund holding high-quality commercial paper, CDs & such from the most developed EU members. Not clear to me, but I'd consider

• holding government-backed assets only: Amundi ETF Govies 0-6 Months Euro Investment Grade UCITS ETF seems like a good choice (but mind the ETF trading fees--not suitable for taking money in and out all the time)
• also government-backed, rock-solid but lower-yielding, are the so-called CNAV MMFs, but the selection on IBKR seems limited, e.g. I saw that BlackRock's CNAV is available, but not the more practical share class with €50K investment minimum (the next-lowest is €1M min. initial investment, which is available but probably not useful for emergency funds).
• if you can live with a LVNAV fund that is considered very secure, perhaps externally rated (see top 10 by size rated by S&P here), but not government-backed, there are several available, with lower minimums (usually 0 or a few K). What's more, IBKR doesn't charge commission for some (e.g. BNP Paribas InstiCash, BlackRock ICS Euro Liquidity [50К min], Amundi, Allianz euro money market funds). This improves returns significantly, if you need money in/out from time to time.
• if you can live with a swap-based MMF ETF, consider also XEON, CSH2, CSH ETFs (but mind the trading fees; check this on swap fund security).

 

[jrchristian]

An another note, when trading EUR bonds yourself: it requires research and may be a bit of a hassle. E.g. I hold a Hungarian bond but Hungary recently decided to charge 15% withholding tax on interest payments to natural persons. I can reduce it to 10% (which is my country's double taxation treaty rate to Hungary), and then claim tax credit for the 10%, but it doesn't happen automatically (not like for US stuff with the W-8 form), and in my case the tax credit is also worth zero, because I do not pay tax on them. So a Romanian bond & Hungarian bond with the same YTM on IBKR have different net YTM for me (Romania doesn't withhold).

 

[bettergifttome011]

@jrchristian If you invest in a short term bond 0-1Y, would you sell your investment after 1 year? Since bond etf don't have maturity date, so it's different than normal bonds, where you get fixed annually return and then at maturity you get your investment + interest. How would this work with bond etfs? When would you consider selling them?

 

[jrchristian]

@bettergifttome011 Not necessarily, 0-1 gov bonds is almost cash-like. You can hold cash for longer, b/c you need the flexibility/stability it offers for one reason or another. But just like it's the safest way to store value in the short term, it's also the easiest way to lose some in the long term (highest chance to lose purchasing power among cash/stocks/bonds). The question gets more interesting with longer maturities. If you know you'll need money in X years, you could lock in a yield by buying individual government bonds (individual corp bonds might be too risky, unless the amount is very high, allowing you to diversify). You could also buy target maturity corp bond funds. Or you could buy traditional constant maturity-range bond funds, but if you don't want to speculate on rates, you should aim for shorter maturity than your actual target date, maybe up to 2x, as recommended here: https://www.bankeronwheels.com/the-definitive-guide-to-bond-index-investing/

 

[bettergifttome011]

@jrchristian So in a way short term bond etf are less risky compared to long term bond etf. But then these etfs act just like any other etf in the exchange. You can buy and sell anytime, so let's say if your target money is fulfilled then you can just sell the bond etf (I will also read the articles in the link, thank you!)

 

[jrchristian]

@bettergifttome011 Yes, less risky in the short term (but riskier in the long term) in real terms (purchasing power). Practically riskless in nominal terms (number not going down, assuming non-negative rates), if issued by highly-rated EU sovereign, but that doesn't mean much if you keep it for longer (in which case you also have opportunity cost for missing out on the very likely higher returns of stocks/bonds). If you know the target date, you can buy longer-term bonds that are just as riskless but also lock in a rate. Though keep in mind you are paying spread & maybe also broker commissions on ETF trades. It may be good to have a look at mutual funds as well, esp. if they are easy to access/cheaper to trade (a bank will give you access but also usually ruin your returns via fees). Amundi's actively-managed

 

[bettergifttome011]

@jrchristian Do you know why would this government bond https://www.justetf.com/en/etf-profile.html?isin=LU0690964092#overview be on the negative returns ? While other also government bonds are on the positive returns?

 

[jrchristian]

@bettergifttome011 Not sure what you are comparing it with, but if I'm not missing something, the differences should come from: different exposure, different duration/interest rate sensitivity, different fund fees.

Different exposure could be e.g. one fund holding a larger share of higher-yielding government bonds (higher-risk countries paying more interest, e.g. Italy currently pays more than +1%pt. on 10y bonds compared to Germany, while Romania pays +3%pt) or bonds in different currencies. Currency-hedged bonds (like the one you linked to) will not deliver the bond yield as expressed in the foreign currency but something different, that I believe should be close to the EUR yield at the same risk level, in theory, but may be different in practice as a result of currency hedging parameters & costs (e.g. consistently wrong short-term assumptions in the currency-forward contracts [by the market, not by the fund manager], that add up over time, sometimes beneficially--it's complex & I don't understand it well enough to give a quick ELI5).