20% a year for 27 years?

by | Jul 31, 2001 | Archives

Twenty delegates just completed our Inspired Investing course with Teddy Christiansen (Jyske Bank) and Steve Rosberg (Highoak Finance). One opportunity we reviewed was the potential of Argentina bonds that now pay up to 26% per annum for as long as 27 years. What's the catch?

Argentina is in its third year of recession and is riddled with international debt. The reduced tax income (caused by the economic slowdown) has so concerned international investors that Argentina's credit appeal has dramatically fallen. So many investors have questioned the ability of Argentina to repay its debt that the price of Sovereign Argentina bonds have fallen dramatically. Prices are so low these bonds currently yielding as high as 26%.

Here is an added benefit. Many of these bonds are denominated in U.S. dollars. That's right U.S. dollar investors can pick up 26% without currency risk.

Here is an even more interesting thought for those who feel the US dollar is overvalued. Many of these bonds that yield 20% or more are denominated in Euros!

In other words investors can get 20% per annum as they speculate in Euros.

In addition the Argentine bond market currently has a reverse yield curve so you can pick up 26% yields on dollar denominated bonds with very short (less than a year) maturities.

The longer bonds appear attractive to me for several reasons. First imagine picking up 20% or more a year in US dollars or Euros for 25 years! You get that return every year for all those years.

The risk is that Argentina could default on its debt. This seems highly doubtful to me based on the “too big to default theory”. I reckon that most substantial sovereign nations (such as Argentina) are similar to large, shaky banks. Their credit worthiness is better than their credit rating, because the rest of the nations (or banks) cannot afford to let them fail.

If Argentina becomes unable to pay, somehow the global community will bail them out. I believe the greatest risk is that shorter bonds will be swapped for a longer term bonds.

This is why longer maturity bonds appear to have less risk.

Who should invest in this type of bond and why? Argentina bonds are not for those who need every penny of their savings and wealth. These bonds are instead good alternatives for investors who have had risk money in equity markets and are impatient for recovery. If you buy these bonds and they do not rise in value, (but do not default) you make 20%, 25%, even 26% a year for the number of years left in the bond. Then get your money back.

If Argentina recovers (as it most certainly will) these long bonds could enjoy amazing appreciation for a quick capital gain. They offer an excellent speculative investment.

Please note the word speculative. Do not invest more than you can afford to lose or have tied up in case there is a reorganization. Do not mortgage the house, spouse and your future to get into these bonds. They can add spice to the return in your portfolio but should not be used as the core instrument to preserve your wealth.

Steve Rosberg has written a report about this it is available now.

You can also get more information about how to buy Argentine bonds from Teddy Christiansen at Jyske Bank – teddy@jyskebank.com

Until next message, good global investing!