It's no secret that U.S. government bonds have been a good place to be for the last couple of years. I'm afraid that trade evaded me completely. One reason, of course, is that I see them in the long term as a triple threat to capital: The risks presented by a declining currency, rising interest rates, and decreasing creditworthiness make them a speculative vehicle. Convertible bonds have been recommended here quite often, and junk bonds occasionally.
The last time straight U.S. government bonds appeared as a buy was in the early 1980s, when issues like the 10.125s of Nov. 94 appeared at 82, showing a current yield of 12.3 percent, with a locked in 22 percent capital gain at maturity to boot. But buying bonds when nominal rates were high, the dollar was low, and the U.S. government was scared enough to make noises about putting its house in order is one thing. Doing so when conditions are just the opposite makes no sense to me. Sure, it's true that U.S. rates could fall to Japanese levels (0.1 percent for short term, 1.31 percent for 10 year paper). But it's just not a bet I care to make.
That said, I know some may wish to make that bet, or would like the security of yield presented by high-grade bonds. As good as the U.S. bond market has done, it's important to note that it has only ranked first in terms of U.S. dollar total returns once since 1986, compared with the world's top 10 major bond markets. In fact, since 1986, the UK, Australia and Japan have each had the world's strongest bond markets three times. Interestingly, the U.S. was worst or second worst five times in that period.
My first choices at the moment remain Australia – and, especially, New Zealand. These two depressed economies, heavily weighted toward commodities, have the potential to recover strongly, and there's little risk. Australian government bonds are currently offering 3.9 percent to 5.3 percent yields, with the A$ at .50; New Zealand government bonds are currently offering 4.8 to 6.3 percent yields, with the NZ$ at .41.
A more exotic trade may prove of interest as well.
Eastern Europe
The expansion of the EU is likely to continue apace. It's a double-edged sword. On the positive side, it makes it easier to cross borders and conduct trade – and it probably reduces the prospect for another war among member countries. On the negative side, it sets up a gigantic, self-perpetuating, tax-hungry bureaucracy in Brussels, which is attempting to micromanage every economic and social transaction on the continent. That's in addition to the threatening face a United Europe (united against whom?, some might ask) presents to the neighboring Muslim world. Forget about the complications presented by NATO, an organization that should have been abolished in 1990 with the collapse of the U.S.S.R. But that's another story.
The reality of the moment seems to be that the EU will continue expanding, and it's wise to look at the possible financial consequences of that. One is that any new member must synchronize its monetary policy with that of the European Currency Union, meeting the guidelines set down by the Maastricht Treaty. Among these are limits on both inflation and interest rates.
On the interest rate front, several ECU countries offer in the area of 3.5 percent for a 3-year bond and 4.5 percent for a 10-year bond – so, if a candidate country would join today, their interest rates must approximate those rates.
A recent example of what can happen is the Czech Republic, which is likely to join the ECU within two years. Its government bonds due in Feb 03 yielded 14.85 percent in March of 98, and today show a yield to maturity of 5.70 percent. It's true that interest rates generally have dropped, but a majority of the gain is due to the perceived stability resulting from joining the EU.
The next countries slated to join are Hungary and Poland and, barring some type of force majeure, rates are likely to drop in these countries as well. Right now three-year Hungarian government bonds are yielding around 8.5 percent; Polish government bonds are yielding around 10.25 percent. Both bonds are denominated in the local currencies, which have been stable.
One problem in buying foreign bonds is that most brokers are neither knowledgeable about them, nor able to effectively deal in them. To that end, I suggest you contact John Kaupisch at Evertrade Direct (888-882-0072, ext. 122). Evertrade is a subsidiary of Everbank (of which I'm a small shareholder), a firm I've recommended here several times in the past.
An important consideration is that although Evertrade is a discount broker, it allows trades in foreign bonds in lots as low as $10,000. Much more importantly, it allows you to keep proceeds from sales, as well as interest and dividends, in the foreign currency of your choice. It saves you the considerable expense of constantly transferring into and out of U.S. dollars. Having ready access to any foreign currency could be a critical factor when the volatility of the dollar (mostly down, at this point) gets serious. You don't want to be in a position where you know what to do, but nobody with whom you deal can do it.
Related offer:
"International Speculator," packed with key investment strategies from world-trekking financial guru – available in the WorldNetDaily online store.