Why I Like Brazilian Bonds Right Now
Date: 04/25/2008Friday, April 25, 2008
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Multicurrency investments can reap rich rewards right now. Take, for example, this multicurrency Brazilian investment.
The recent drop in U.S. dollar interest rates means you can now borrow dollars at between 4.175% and 4.875%.
Brazil's currency, the real, makes sense for multicurrency diversification because Latin America is the fastest-growing emerging region.
You can borrow U.S. dollars to make multicurrency investments from Jyske Bank at rates a bit above and below 4.5% depending on the amount borrowed.
You can also buy Brazilian bonds that yield around 11%.
For example, earlier this month, Jyske Bank offered these two Brazilian government bonds:
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- Brazil 12.5% maturing 2016 yield 10.9%
- Brazil 12.5% maturing 2022 yield 11.0%.
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If you invest $100,000 (the minimum for a leveraged account) and borrow $100,000 at 4.5%, investing both the loan and original investment in Brazil, with $100,000 in each of these bonds…your average return after fees will be about 10%. That works out to $20,000 per year income on $100,000 invested…or 20% per annum.
Plus, the Brazilian currency has appreciated enormously versus the U.S. dollar. This could add an extra profit.
Yes, there is risk. The dollar-real rate could also create a loss.
For example, in the last year, the dollar has dropped versus the real until March. Now the dollar is having a mild recovery. Had you made the investment above in March, you would have experienced some downward pressure on your loan.
Plus, there is always the risk that interest rates could rise, which will reduce the value of the bonds. Brazil's investment rating could fall. Dollar interest rates can rise. Any of these events would reduce profits and could even create a loss.
These risks are why you should never leverage to invest in currencies more than you can afford to lose.
On the other hand, compare the risk premium. The leveraged Brazilian bonds pay you 20% per annum to take this risk.
But there is risk in holding any investment. The investment that is deemed the safest in the world, U.S. Treasury bonds, has risk. Inflation can (and has for the past 40 years) chew the bond's purchasing power to pieces.
On the same day that the Brazil bonds paid 11%, the 10-year U.S. bond paid 3.59%. Add this up for 10 years. The Brazilian bonds pay you 20% per annum—that’s 200% over 10 years. The Treasury bonds pay 3.59%, or 35.9% in total.
Are the Brazilian bonds that risky, we must ask? The overall picture is not quite this simple, but these numbers reflect the general idea.
There are ways to make this type of investing safer, such as borrowing more than one currency, and/or investing in more than one type of bond. For example, a yen and dollar loan invested in Russian, Turkish, Brazilian, Indonesian, and South African bonds spreads the risk and increases the risk premium.
Gary Scott
For International Living
Editor’s note: Gary Scott, a longtime friend of IL, has been analyzing and writing about global investments for more than 30 years. His multicurrency education service teaches individuals how to create their own global value-oriented investment portfolio that can take advantage of opportunities U.S. investors are often unaware of. Gary will explore this in more detail when he speaks at International Living's Ultimate Event in Cancun, Mexico, May 28–31.
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