2% loans!

by | Jul 17, 2001 | Archives

The interest rate on Japanese yen has dropped again. Here is an example of making a real estate investment with a $100,000 loan at 1.625%. See how such loans are available right now.

The lender is Jyske Bank, but there are many banks that offer such loans. This is true. Just made such a loan myself. What's the trick? Borrow Japanese yen. 1.625% to 2% is the going rate for such loans now.

Does this mean you must invest in Japan or Japanese real estate?


For a tiny spread you convert the Japanese yen back into US dollars

There is a cost to this yen loan called the forex risk. If the yen rises in value versus the US dollar, you can lose money. One has to understand this and know how to assess this risk if taking this type of loan. However there is a balancing benefit as well. If the yen falls versus the dollar you can make an extra profit.

These loans are called collateral loans because banks that make them will only do so if the borrower gives sufficient liquid assets as collateral for the loan. For example if you have CDs earning between 4% and 5%, you are ahead borrowing at 1.625%. You make between 2.375% to 3.375% for taking the forex risk. This is called positive carry.

There are two ways to use these collateral loans. The first way is to invest in something outside the lending bank, such as borrow to invest in real estate in the U.S. When you use this approach you have to have more collateral at the bank than your loan. The bank does not want to accept your forex risk and if your borrowed currency rises in vale they want the extra security to offset the loss in collateral value..

Alternatively you can borrow to leverage investments that are held at the bank where you borrow. In this instance you can leverage quite small investments into much more substantial portfolios.

For example here is a leveraged model portfolio you could set up if you deposited $25,000 in stocks, bonds, mutual funds or CDs at the bank. This example shows a portfolio that uses a 6.930% Ford bond as collateral to borrow $100,000 worth of Japanese yen at 1.625%. The loan is then converted and invested one third into a Polish zloty CD that pays 16.25%, one third into Iceland kroner CD that pays 11.250% and one third into Hungarian government bonds that yield 8.88%

Here is the portfolio and its projected annual return:

Amount             Investment			Yield		Return in dollars
$25,000 Ford Motor Corp Bond 6.390% $1,597
$33,333 Polish Zloty CD 16.255% $5,417
$33,333 Icelandic CD 11.250% $3,751
$33,333 Hungarian Gvt Bonds 8.888% $2,962

That brings a total return of $13,727 on an investment of $25,000 or a projected annual return of over 55%.

This sample portfolio is very speculative and contains plenty of risk. You could on the other hand have an even better return if the yen's value falls. Some banks would not even let you take this much risk. There are many other portfolios that are more diversified. One example borrows yen, Swiss francs (at 4.625%), and Swedish kroner (4.375%) and spread the risk into eight currencies; euro emerging market bonds yielding 8.700% (15%), Icelandic kroner T Notes yielding 10.600% (5%), Australian dollar Toyota Motor bonds yielding 5.62% (20%), Danish kroner Bank bonds yielding 6.500% (20%), New Zealand dollar World Bank bonds yielding 6.320% (10%), Hungarian Florin Government bonds yielding 8.850% (10%), Norwegian kroner Government bonds yielding 7.22% (10%) and South African Rand Commerzbank bonds yielding 10.500% (10%). Borrowing three currencies and investing in eight currencies greatly reduces risk, but also lowers the returns. the projected annual return on this portfolio is 16.49%. This portfolio is more likely to be recommended by conservative banks.

How much risk you take or not depends on a multitude of factors, including your experience, risk tolerance, timing of liquidity needs and most of all how much you can afford to lose.

More details on the specific investments shown above are available from Teddy Cristiansen at Jyske Bank teddy@jyskebank.dk

Teddy will help me conduct our upcoming course on global investing this July 27 through July 29 along with Steve Rosberg a specialist in emerging market bonds (to help us learn where to invest the low cost loans).

Until next message, good investing!