How to Make 13.04% on US Government bonds

by | Dec 28, 2001 | Archives

Here's how money will be made by a select few from the Argentine disaster.

Dear International Friend,

Yesterday we looked at how Argentina's debt default might create opportunity for a few. Here is what eclub advisor Steve Rosberg in Buenos Aires has to say.


Here are some ideas on how money may be made in Argentina bonds. however, a more interesting flash will have to wait until Jan 2 or 3 when the new government's intentions and prospects are clearer. notice has been served that argentine debt principal and interest will not be paid until a rescheduling has been agreed upon. I believe that this will take the shape of extended grace periods, lower interest rates. and just probably no “haircut”. you are however right in that present prices already contain a great haircut. one bond that is particularly interesting because of its contained risk is the par bond. it was issued under the Brady rescheduling. principal is guaranteed by a us treasury zero coupon (which Argentina bought at the time of issue, and deposited with a us bank). the latest price on the bond is about 46 cents on the dollar. it receives 6 per cent (on 100, not on 46) interest per annum. however, the value of the zero coupon guaranty is about 36 cents on the dollar. also guaranteed are the two coming interest payments (as the argentine government deposits these in advance), which means another 6 cents on the dollar are not at risk either. note the following particulars of the argentine par bonds:issued on march 31, 1993, maturity march 31, 2023semi-annual interest payments interest rate:

	year 1 - 4%	year 2 - 4.25%	year 3 - 5%	year 4 - 5.25%	year 5 - 5.5%	year 6 - 5.75%	thereafter: 6% (*)

The position that the previous government was negotiating with thebondholders was to try to reach an interest rate of 7% on the debt. as thisbond was below that interest rate, it was not to be included in that renegotiation. it could conceivably still be left out of any, even if the yields aren't potentially as astronomical as other bonds,there is substantially less risk which, in my opinion, is still wellremunerated.

To start 2002 with a bang this may be one asset in which to do it.


Here is what Steve's message means. If you buy a $1,000 par bond at 46 youinvest $460. This bond pays $60 per annum interest (6% on $1,000). Thisis a 13.04% return of which an upcoming $60 interest is safe and $1,000 isguaranteed to be returned in 2023 by US government zero couponbonds. This is the worst case scenario. However if this bond is notrescheduled (and since it only pays 6% it may not be) then the bond holderearns 13%.

We'll look at what the Argentine mess can do to global economics in tomorrow'smessage. Until then, goodglobal business and investing!