IN THE ALTAR OF THE MARKET…….
WHERE BONDS AND CURRENCY VOWS..UNTIL DEATH DO THEM APART.
heheheheh……am always amazed over how bond investors really are…currency traders ..but little do they know themselves as such…to be precise what is a bond literary… …?
What is featured in a bond is actually a currency …not apples, bananas…or oranges…
So when you buy a bond..You are actually buying a currency because a bond is a certificate indicating the asset (currency) you have purchased, over what period, and for what returns …
However as many of you know, I’ve been trading currencies in the Forex market for years now. I’ve made a career out of pairing the euro with the dollar, the Japanese yen with the euro, and the Swiss franc with the euro…among other currency pairs.
But even though I’m a traditional Forex trader and I’m constantly checking the bid and ask prices for my favorite currency pairs, I’m still always looking for other currency opportunities around the globe…even the more obscure, “unsung” currency plays.
Take foreign bonds for instance. Investors, even American investors have been able to buy foreign bonds for decades. Yet, few foreign bond investors really think of themselves as “currency investors.” The reason? They don’t realize a foreign bond is also a “currency play” too.
The irony of all this? Foreign bonds are actually one of the most intriguing currency plays in the market today.no wonder when bonds of a country falls the currency also do.
If you choose the right one, you can actually profit in three different ways…from capital gains (assuming you buy a bond below par), yield, and currency appreciation if the dollar drops against the currency your bond is denominated in.
In that way, this “unsung” currency play is actually a profit trifecta…if you can choose the right one.
Let me explain…Why the Currency Matters…
When you are investing in a foreign bond, you not only need to have an opinion about what that bond will do but also an opinion about how that country’s currency will fare against your own.
This is where the currency play kicks in.
For instance, if a foreign bond earned you 8% interest…that sounds great, right? However, what if I tell you, while you had invested in that bond……, your currency strengthened 10% against that foreign bond’s currency?
Then its not such a good idea……right…?
Because as much as you got 8% total return on the bond yield …….your currency strengthened against that currency whom you were holding it bond ….meaning your 8% returns from bond…having been dominated in foreign currency of that bond …. will have to be divided by 10% more by your mother currency during conversion ……Gain 8% but lose 10% when you go to convert the money back into your home currency.
Let me give a clear cut illustration here…….
Lets say we decide to take on Ugandan bonds for instance which are giving 10% total return per year….right…..?
During the time of our move to invest there …lets assume the exchange rate was……………. Ksh 1= 20 Ughs………
So we move in with Ksh 10,000 which when converted..We get Ugsh 200,000….okay…
One year down the line…….things changes….and our currency (Ksh) appreciated by 50% to …..
Ksh 1 = 30Ugsh……..
During that time is when we are getting back what we invested…..as in our Ughs 200,000 + 10% bond yield return is now Ugsh 220,000….right….?
Then …as the exchange rate is now Ksh 1 = 30 Ugsh…then it will be 200,000 Ugandan shilling divided by the current exchange rate…….ie
Ugsh 200,000 (capital invested) divided by 30(current exchange rate)
= Ksh 6,666
See…..! ! ! !
Total loss instead…..…hmmmm, terrible…….
However, what if I told you that a foreign bond earned 10% but your home currency weakened against the foreign bond’s currency by 50%?
As in…..we decide to take on Egyptian bonds…….and during our move to invest ….
1egyptian pound was Ksh 20.
Thus our KSH 10,000 is equivalent to 500 Egyptian pounds…….
Then one year later …the Kenya shilling weakens by 50% against the Egyptian pound… bringing the exchange rate to ……1Egyptian pound is now 30 kenya shillings.
Looks hear…when we offload our investment we shall have back our 500 Egyptian pound plus 10% yield return.
Ie 500 Egyptian pound + 10% which is 550 Egyptian pound.
Then as we enjoy the depreciation of our local currency…..then it shall be multiplied by 30 …..Which is 50% more than when we got in …….ie
Egyptian pound 550 x 30 current rate of exchange = Ksh 16500
Now, by the time you take your 10% gains and convert them back into your home currency, you end up with 65% more money than you had before! Now, we’re talking!
Heheheh …I know this is what you waited to hear most…
During the hardest times of the market..this is how we do it at corporate fx……we don’t just keep on looking at the candle sticks and baby sitting the market…ooohhh…. no…no…no.
We move into those countries central banks….purchase their bond as we know their bonds and their currency will appreciate against ours over the time…..we purchase the bonds and forget the market for some months…..then we go swimming, we go hiking…we go camping….we go fishing…or we go to sleep lazily by the sea side writing love poems…
And it is as such high sea levels of forex that technical traders are left out completely...during such times they are not divers rather they are swimmers...and they have to stay in the shallow sea waiting for us.
For instance when you guys were breaking your ribs and necks buying safaricom I P O’s….we went for Ugandan shillings……..two months later were 36% richer……heheheh….
Therefore…. turbo Charge Your Returns by Picking the Strongest Country FIRST!
So when you’re looking to buy a foreign bond, the yield or potential capital gains your bond can earn are just part of the equation.
Therefore…. turbo Charge Your Returns by Picking the Strongest Country FIRST!
The other vital part is what happens to the dollar and your bond’s foreign currency from the time you buy your foreign bond and its maturity date. Depending on the currency, it can either hurt your overall returns, or it can turbo-charge your returns.
Therefore, the way I’d play currency move using foreign bonds is to FIRST get an opinion on the foreign currency and how you think it will perform vs. your home currency.
Then if you believe the foreign currency will trounce your home currency for the period of the investment……..,, then look into their bonds.
That way, if you’re right about the foreign currency’s direction vs. your home currency, you stand a much better chance of making a really nice return on your money (over and above the actual interest earned on the bond itself).
Your Bond Checklist: Things Your Bonds Need
So ……., “How do you know what country could be good to invest in?”
When looking at a bond, you want the highest yield for the least amount of risk.
Some of this you can gauge by S&P and Moody’s outlook in how they rate a specific country’s bonds.
I’d suggest investing in “investment grade” bonds for your first bond investments.
Government bonds can be a great place to invest…..”lakini sio kama hizi za hapa kwetu kenya”, for instance, if you can ascertain whether the country is in good shape to make good on its bond payments, then you can ascertain the risk that you’re taking on.
Personally, I look for countries that have some of the highest GDP growth out there and have the least amount of debt proportionately. Here’s my checklist. I look for bonds from countries with…
1. High growth possibilities
2. Doesn’t have a mountain of debt
3. Has a favorable rating from S&P or Moodys…etc
Just to recap, get an opinion on the overall state of your own country’s economy vs. the economy of the foreign currency. See which currency has the best sentiment and fundamentals going for it.
Find a country that is hitting on all cylinders and looks to outperform your country and your native currency. Then find that country’s investment grade bonds (preferably their government backed treasuries at first).
Then if you’re right on the direction of the currency, you’ll get a great “bonus” in addition to the interest. In doing the proper analysis, it can really help your money to beat inflation, unlike our bonds here which cannot fight inflation with their returns.
This can be a great way to stretch your retirement scheme or to simply “outpace” the inflation coming from your home country!
And that how sometimes we move to the most obscure…unsung currency play…
Your future depends on your dreams so go to sleep !