How to Own Government Bonds Yielding 8.7%
I can imagine what you’re thinking after reading the headline of today’s issue…
“Government bonds don’t yield 8.7%. I can go to dozens of websites and show you that 10-year Treasuries pay 2.0%”
Truth is, you’re correct. Ten-year U.S. Treasury bonds only pay about 2% annually…
But I’ve found some government bonds paying 5.5%… 7.5%… and even 8.7%.
The catch? It’s not really a catch, it’s just that these bonds don’t come courtesy of the U.S. government. Let me show you a few examples…
The nine-year note in Chile is paying 5.9%, Russia’s 10-year is paying 7.7%, and India’s 10-year bond is paying a staggering 8.7% yield.
Now I’m sure you’re thinking, aren’t these risky? You’d actually be surprised…
Though there have been a number of instances of foreign governments defaulting over the years, the sovereign debt default rate is still far below that for corporate debt.
And in a study conducted by Moody’s, the credit-ratings agency found that the default rate on investment-grade sovereign debt was just 0.667% after 10 years of issuance. In other words, more than 99% of government bonds were still in good standing after a decade.
Don’t forget… it wasn’t long ago that the United States lost its coveted “AAA” rating from Standard & Poor’s. We have $15 trillion in debt — that’s more than 100% of our gross domestic product (GDP). And the current annual deficit sits at 9% of a year… or about $1.3 trillion.
And even after lowering the United States’ credit rating, Standard & Poor’s still has our rating on a “negative” outlook, meaning it could be lowered further.
Now don’t get me wrong, even after the credit rating downgrade, the U.S. is still one of the safest markets for your money… but it’s not infallible.
Meanwhile, other nations’ finances are getting better.
Take Chile for instance. Right now, Chile’s is growing at a 6% annual rate. That growth is accompanied by perhaps the most fiscally conservative government on the planet. Chile’s public debt totals just 9% of GDP, according to the CIA World Factbook.
In fact, Chile is required by law to run a budget surplus unless there are extreme circumstances. In 2011, it ran a surplus of roughly 1%.
It’s little surprise, then, that Standard and Poor’s gives Chile an “A+” credit rating.
Meanwhile, other countries are quickly gaining too…
Both Slovenia and Israel hold an “A+” rating… and just last year, S&P upgraded the Czech Republic two notches from “A” to “AA-,” putting the country just three steps below the coveted “AAA” rating.
Of course, none of this means anything if you can’t own these bonds… and for investors, the world of sovereign debt was all but closed just a few years ago.
But that’s no longer the case. Today, there is a simple way you can invest in these high-yield government bonds without leaving the U.S. stock exchanges.
In recent years, large fund companies like Fidelity, Eaton Vance, and others have expanded their international options by launching dozens of new mutual funds, exchange-traded funds (ETFs) and closed-end funds. In doing so, they’ve given U.S. investors an easy way to invest in foreign markets.
Here’s how it works…
These fund companies access foreign markets and buy stakes in dozens or even hundreds of foreign securities. They then package these securities into funds, and they sell the fund’s shares here in the United States. When you purchase one of these funds, it gives you direct exposure to a basket of foreign investments. And many funds focus on foreign government bonds.
For example, Templeton Global Income Fund, Inc. (NYSE: GIM) holds a stake in government bonds from over 10 different countries — including many in the emerging markets.
Normally, it would be impossible for U.S. investors to purchase most of these bonds directly. But with the Templeton Global Income Fund, buying and selling foreign bonds couldn’t be any easier. The fund trades right here at home on the New York Stock Exchange under the ticker symbol “GIM.” You can buy it just as easily as you would a share of IBM (NYSE: IBM).
Action to Take –> There are dozens of funds just like GIM that investors the chance to profit from higher interest rates abroad. So if you’re tired of earning 2% from Treasury bonds here at home, then consider buying into one of these funds… they’re a great way to supercharge your yields in this 0% interest rate environment.
An added bonus? Most of the funds investing in sovereign debt pay dividends monthly — a nice treat for us income investors.
P.S. — Higher yielding government bonds are just one of the perks of investing internationally. The truth is, most of the securities that offer double-digit yields trade outside the U.S. market.
In fact, my research team and I recently put together a presentation over this very subject. As it turns out, there are only 17 stocks in the United States paying over 12% dividend yields… but there are more than 210 of these high-yielders trading abroad. I have more information — including the full list of the 17 U.S. stocks paying over 12% — in this presentation here.