Emerging Currency Bonds Leveraged

by | Oct 8, 2008 | Multi Currency Investing

Our last four lessons have looked at three emerging bond portfolios. This lesson looks at what happens when we apply leverage to an emerging bond portfolio.

One of the lesson reviewed a portfolio of dollar denominated emerging bonds.

Country Maturity Yield

South Africa 2012 5.21%
Indonesia 2014 6.42%
Russia 2010 5.38%
Colombia 2011 6.15%

The average yield in this portfolio is 5.79%. Because these bonds have a very short maturity, the chance of default is minimal, The portfolio is back by four governments. Yet in this case you earn nearly double the yield of a US treasury bond due in 2013 which pays only 3.1%.

Here is where things become interesting. The credit crunch is pushing bond yields up, but the global economic decline is forcing governments to push lending interest rates down.

This means that you can borrow US dollars from Jyske Bank in the 4% range. So you can borrow at 4% to invest in a portfolio of bonds that yields 5.79%….or more.

If you invest $100,000, your yield at 5.79% is $5,790.

If you borrow $100,000 and invest it in the same portfolio, you earn another $5,790.

Your interest costs are $4,000 in a year.

Your yield now is $11,580 less $4,000 or $7,580. You have increased your return by $1,790.

There is no currency risk. The loan is in dollars and the investment is in dollars.

What are the risks?

One risk is that the interest rate on the loan could rise. In this case you would normally just sell bonds to pay off the loan if the interest rate of your loan rose higher than your yield.

However this lesson has greater value because there is another risk…normally so remote we would barely mention it. With such short term bonds the capital value of good and even medium risk borrowers would hardly ever fall, nless there was some special cor[porate misfortune. Never would we expect all short term investment grade bonds to lose capitasl value.

These are not normal times so…we are gaining real time lessons we may never see again.

Look at some of these current corporate bond yields.

Currency Maturity Borrower Price Yield

USD 15/06/2010 DAIMLERCHRYS 92.63 13.01%

USD 12/01/2009 FORD MOTOR CRED 89.50 51.57%

USD 15/09/2011 GMAC 34.00 54.27%

These yields show that risk is even in short term bonds. They can fall so much in capital value that the bank will ask for more collateral on the loan. Had you purchased these bonds a few months ago, the capital value of your portfolio may have fallen a lot.

A quick review of the dollar denominated portfolio we studied in the recent lesson shows that the rush out of corporate bonds has not hurt emerging government bonds much at all.

Country Maturity Yield week ago Yield now

South Africa 2012 5.21% 5.49%
Indonesia 2014 6.42% 6.54%
Russia 2010 5.38% 5.21%
Colombia 2011 6.15% 7.74

I am reviewing the potential of these incredible yields with Jyske now and we’ll see what all this may mean next lesson.


Join me this  November and learn more about Ecuador and emerging bonds.  Hear  Merri, me, Steve Marchant, Kjetil Haugan and Peter Conradsen of Jyske Global Asset Management in Cotacachi Ecuador. We’ll review economic conditions, Ecuador real estate, my entire portfolio and investing and business ideas for the months ahead.

Nov 7-9 2008 International Investing and Business Made EZ Ecuador

See the wonderful balconies in the Primavera condos at for sale at $46,000 in Cotacachi.



multi-currency-Ecuador-condo office

Nov 10-11 Imbabura Real Estate tour

Then travel to the coast. Enjoy the Vistazul fresh seafood caught in front of the hotel by these fishermen on Ecuador’s Pacific.

San Clemente Fishermen

November 12-15, 2008 Ecuador Coastal Real Estate Tour; Quito Real Estate Tour

See discounts for two or more of these courses and tours