Iceland Bonds

by | Oct 2, 2008 | Multi Currency Investing

Iceland bonds are at greater risk now.

A Multi Currency Course subscriber just asked this question.

“We hold a Iceland kroner bond that matures in 8 months —- it has already lost value due to currency devaluation around 30 percent —- so in your opinion in the next 8 months will it fall even further? My gut feeling is that to hold it till maturity which means June 12th 2009. Please advise. I would appreciate your view on ISK. Thanks.”

First this investor should be discussing this with his investment adviser to see how the bond relates to his entire financial position. There are three questions to answer here beyond this.

#1: How much will it cost to sell the bond and buy something else compared to holding to maturity and compared to addition potential forex loss.

#2: What options are availabel with the liquidated fuds. How much more potential is available?

#3: What is the potential of further erosion of the ISK?

Fundamentals suggest that the Icelandic dollar will fall more.

Personally I have never liked Icelandic bonds because the currency has such a history of devaluation. I have never invested in such a bond myself.

Jyske Bank is advising that Icelandic currency may drop more in an advisory quoted in our last lesson which said:

“From Iceland to Hungary… * The international financial crisis is flourishing. It causes banks to close down, and today Glitnir in Iceland joined the club and had to be given artificial respiration by the Icelandic state. This has prompted us to change the composition of our model portfolio… * We are worried that ISK may weaken further, and we therefore sell our ISK-denominated bonds. Instead we buy Hungarian HUF-denominated bonds.”

This question leads to the emerging bond portfolio mentioned in last lesson.

Borrower Currency Maturity Yield

Eur Inv Bnk ZAR Rand 2009 11.51%
Hungary HUF Florin 2009 8.49%
RABOBANK RON Leu 2010 10.48%
Gazprom RUB Ruble 2010 7.00%
Eur Inv Bnk TRY Lira 2010 17.25%
Brazil BRL Cruzero 2016 11.13%
Egypt EGP Pound 2012 10.81%
Mexico MXN Peso 2009 8.24%

This portfolio has the potential to be one of the safest and best yielding bond portfolios.

It is backed by four government and three top quality borrowers. The yield is over 10% and it is globally diversified. Plus the currencies have potential to appreciate versus the US dollar.

Next lesson looks at the potential for currency appreciation in this portfolio.

Until then, good global investing.