The global bond market offers U.S.-based investors the opportunity to add both higher yields and diversity to their fixed income portfolios. With current U.S. Treasuries and Bank CD’s yielding returns that are lower than than even the current inflation rate, income investors are increasingly being forced to either continue losing buying power “safely,” or to hunt for alternate (added risk) fixed income investments in a jungle of choices. When you add together the U.S. dollar’s declining value against other currencies and the Federal Reserve's tremendous increase of money supply, mix in the friction and fighting by both political parties over what should be agreed upon as a “workable plan” to start addressing this nation’s large and growing debt woes, here at Durig Capital we have good reason to believe that acquiring global debt instruments with significantly higher yields may be a vital ingredient to help reduce risk by providing some unique diversification while being likely to greatly enhance fixed income cash flow. This is especially applicable if all of a person’s net worth (i.e., their income, business, home, car, etc.) is based solely in U.S. currency.
A well informed investor will have more options to choose between, and we believe this should include a comparison of broadly traded U.S. debt instruments to similar offerings issuers may have denominated in other global currencies. Acquiring various investment grade International bonds appears U.S. to be a very prudent hedge in this current environment of uncertainty that is likely to offer some degree of shelter from the possibility of a further erosion of wealth, a downward spiral which is perhaps similar to what Japan’s wealthy have experienced over the last decade. Using a simple common sense diversification plan may be the proactive strategy that could put or keep a person on the right investment path, even if the U.S. is not.
Here is Durig Capital’s quick rundown of a few more commonly quoted international bonds:
A stronger demand for Australia’s 10 year government bond since our last report has resulted in lower its yield to 5.03%. Also noteworthy has been been the renewed strength of the Aussie dollar, now worth near US$ 1.065, a 0.7% gain from our report just three weeks ago.
Brazil government $US bonds were priced today at 4.188% for ten years, well less than half the yield of similar bonds denominated in the real. On the corporate side, Bank of America (BAC)’s Brazilian real bond maturing 11-19-2014 is yielding over 8 ¾%, compared to their U.S. dollar offering with a two month shorter duration yielding far less than one third that of the real. Add to that Brazilian president Dilma Rousseff’s comment last week that her administration had no plans to take any new measures against a rising currency, and that the real is now at its strongest level since the summer of 2008.
Mexico’s ten year government peso bond yields rose slightly earlier this week to about 7.2%, partly in response to the sell-off in U.S. treasuries and investors demand for a larger yield premium. Similarly, GE Capital (GE)’s Mexican peso denominated Oct. 2015 AA rated bond trades with about an 8.5% yield, over 2.5 times its similar length U.S. Dollar denominated bond, and near a 6% net difference. By other comparisons, this GE Capital Mexico/US yield spread appears about 2.5% greater than the GE Capital Australian/US yield spread.
Columbia’s10 year government bonds appear to be yielding around 7.87%, and have the same credit rating as it’s more well known and prominent neighbor to the south, Brazil. However, the Columbian peso has been the stronger currency this year, gaining 7.4% against the dollar.
The yield for Greece’s CCC rated government bond yield remains inverted, but has strengthened slightly in response to promises for renewed EU support with the ten year ending at 16.569%. Continued concerns kept the two year note at 29.769%, as well as aligning Italy as the next in line for spanking.
The United States 10 year government bond yield sank back to below 3% after experiencing a brief move to 3.2 earlier last week. As the August imposed deadline for raising the debt ceiling nears, the market’s have plainly imposed little to no credibility to a default aside from the dollar’s claim appears secure in it’s default title as the world’s reserve currency.
Accessibility and Liquidity
Most if not all of the bonds listed above are widely available on most major world exchanges, and availble to retails investors. The current rate, price, and currency exchange rates are subject to sudden and rapid changes, and the above comparison are meant to serve as a general guidline to recent trends and not to suggest a firm quote. To learn more about current bond rates and how to diversify into various foreign government and bonds, please visit U.S. us here for the most recent trends and updates.
We believe that anyone considering certain fixed income corporate bond issues such as GE, with over 400 billion in total debt, or Bank of America, with over 800 billion in debt outstanding, should review all of their debt instruments including those denominated in other global currencies. By considering a basket of world currencies investors can often find debt issues with similar maturities, with the same or similar default risk, but with significantly higher yields that (depending of their situation) may even reduce their overall portfolio risk. Likewise, income investors seeking higher yields might consider reviewing sovereign bonds beyond U.S. Government debt obligations, which over the last 10 years have outperformed.
Disclosure: I am long GE, BAC. We currently have clients in Brazilian Govt. & Corp. bonds, Australian Govt. and Corp. bonds, and U.S. Govt. and Corp. bonds.