Sovereign credit ratings

Here is a map, courtesy BusinessWeek, of credit ratings for countries rated by S&P (as usual with images, click for a larger image):



If you were to invest in a foreign bond, which one would it be? I'm developing an idea I've been thinking about for a while now. The idea is to invest in Brazilian bonds (assuming it's possible) and keep rolling* them (say every 3 years).


(* You need to keep rolling them over to maximize capital gains. The reason you are investing, at least with my strategy, is for capital gains (not interest income.))

Comments

  1. contrariandutchJune 21, 2009 at 12:54 PM

    Errr...

    I may be a bit thick here, but how is this capital gains thing supposed to work? Are Brazilian bonds trading at deep discounts to par?

    ReplyDelete
  2. SivaramJune 21, 2009 at 4:05 PM

    No, it's not trading below any notion of an intrinc value. Rather, it's a bet on declining interest rates. It's just a very preliminary idea but here is my thinking.

    Gary Shilling, the so-called perma-bear, supposedly became financially independent by investing in US Treasury bonds in the 80's and 90's (this was mentioned in John Mauldin's book, Just One Thing). I don't know the exact details but he suggested that his strategy was to take a long position and continuously roll them over (he didn't say but maybe every year or two.) He actually used leverage, which probably was not very risky given how he was dealing with US government bonds, but if one didn't use leverage, the returns would have slightly lower. Overall, though, rolling long-term bonds would have produced very good returns and may have even beaten stocks, except for a short period in the late 90's (I am guessing here.)

    Essentially, he was betting on declining yields. Most of his return would have come from the capital gains arising from the decline in yields. I have to study this more but Shilling was saying that you need to keep rolling them over to keep duration long and maximize capital gains (i.e. if you bought a 20-year bond 10 years ago and kept it, it would only have 10 years left now whereas rolling it over preserves the long-term exposure.)


    So, me being the 'always inquisitive but terrible investor' started thinking about how one can replicate this strategy. Unfortunately, bond yields throughout the world are near all-time lows. But some developing countries have high yields. I narrowed it down to Brazil, although I'm looking at other possibilities as well.

    Short-term rates in Brazil are around 9% while long-term (8yr) are around 12% (Bloomberg data). This sort of gives some good starting figures. One probably needs a starting yield of around 10%. If one assumes the country develops itself a bit further over the next 20 years, its yield can probably drop all the way down to 5%.

    I haven't done the research yet...will inflation will be brought under control? Brazil's fiscal management also seems to be better than many others. Brazil has a terrible history but if future governments follow the present government--always a big if, and heavily dependent on commodity prices--its bonds seem somewhat safer than many other developing countries.

    One also needs to think about whether the currency will decline. I have to think more about this.

    It's also not clear if Brazilian govt bonds can be easily purchased by small investors (with reasonably low commissions.)

    Anyway, this is just an idea... sort of like my junk bond idea from late last year, which I never really executed...

    ReplyDelete

Post a Comment

Popular Posts

Thoughts on the stock market - March 2020

Image
Right now, DJIA has a P/E of 16.8 and forwand P/E of 15.1, whereas S&P 500 is at 20.1 with forward P/E of 15.8. Source: WSJ market Data If you ignore interest rates and inflation expectations--both of these influence valuations but depends on your macro call-- the market is not cheap. Long-term P/E is around 15. Trailing P/E is around 20% (Dow) to 40% (S&P500) higher than average. Forward P/E is in line with long term average but that assumes a strong V recovery. Consensus forecast is for profits to drop 1.2% in 2020. In 2008, it dropped 25.4% so current forecast is a very mild recession. Covid-19 coronavirus is not going to last more than a few months but these forecasts are still too rosy in my opinion. So I wouldn't rely on forward P/E. The richly valued (mostly tech or high quality) have not fallen much but the distressed ones have. So if you want to outperform in the long run, I think one’s choice right now is to: • Wait for market to fall another, say
✖ READ MORE >>>

Warren Buffett's Evolution and his Three Investment Styles

Image
A Young Warren Buffett In a comment to one of my posts , Mark Carter, who incidentally appears to have a  good blog worth checking out , asked: "Buffett Prime is 1970's to early 1990's" Could you elaborate? I have vaguely indicated how I view Warren Buffett in the past, but I thought I would detail my view of his investing behaviour. This is more of an opinion piece and many others would disagree with me (if you do, I'm curious to hear your thoughts). I don't follow Warren Buffett as closely as many value investors so I may get some facts wrong. My view is that Warren Buffett went through three different phases, with each consisting of different investment techniques. The overall investment theory remained the same—what people call value investing—but his execution, tactics, and strategy differs across the three phases. Some people may break up his career into additional periods but my feeling is that the three I will describe essentially capt
✖ READ MORE >>>

Hugh Hendry discussion at the Alternative Investment Conference

Thanks to Value Investing World for bringing this Hugh Hendry interview to my attention. I may not agree with all the things—short-term orientation of hedge funds is actually worse IMO; the sharp pencil effect doesn't always work—but Hendry is a true contrarian and worth listening. Like Marc Faber or Jim Rogers, you also can't take everything Hugh Hendry says seriously. I had always felt Hugh Hendry was firmly in the deflation camp but I get the feeling that he is now opening up to high-inflation possibilities. Otherwise, his stance appears to be similar to past opinions.
✖ READ MORE >>>