A Safe, 14.4% Yield Backed by Uncle Sam Is Now for the Taking

Andy Obermueller's picture

Wednesday, March 4, 2009 - 2:10pm

by Andy Obermueller

Pop quiz: Who's the most credit-worthy borrower in the world?

     Seven U.S. companies have "AAA" credit ratings, the highest available from Standard & Poor's. Among these titans of industry are such names as Johnson & Johnson, Microsoft and Berkshire Hathaway.

     But one -- and only one -- entity is even more highly rated.

     Your Uncle Sam.

      He's never defaulted. He's never made a late payment. And even though we joke that some companies print money, the U.S. government actually does, and it's among the soundest currencies. The U.S. government -- supported by your tax dollars -- is the most credit-worthy borrower in the world.

    So if the Treasury backs your debt, it's backed, no questions asked. In fact, if you look at any bank's quarterly report to the FDIC, you'll see that it actually subtracts the value of any government-backed debt from its past-due loans. That's not a bailout thing, they've always done it. If Uncle Sam says he's going to pay, he's going to pay. Send the bill to Washington.

     Just so we're 100% clear, the point I'm trying to make is that absolutely nothing beats a U.S. government guarantee. The only two things more certain are death and taxes.

    The problem is that this guarantee doesn't pay much. There's no risk, so there's no reward. A two-year T-bill doesn't even pay 1%. So if I told you about a security with a government guarantee that was yielding nearly 15%, you'd jump at the chance, right?

     I mean, that's a better rate of return than Warren Buffett got from his recent sweetheart deals with Swiss Re (OTC: SWCEY), General Electric (NYSE: GE) and Goldman Sachs (NYSE: GS). That's a better rate of return than the long-term average of the S&P.

     Here's how it works: A company buys long-term securities. Now, the longer the term, the more risk, so to mitigate that downside, the company only buys securities that have -- wait for it -- a government guarantee. So now, instead of buying long-term securities with significant credit risk, the company is buying securities with functionally zero credit risk.

     To pay for these securities, the company borrows money, but only for the very short term. These loans are made at very low rates. Result: The company borrows at a very low rate and lends at a relatively high rate -- and pockets the spread.

     Remember that wisecrack we made about printing money? This company does it. And since it is structured as a real estate investment trust, it can't keep the money around. It is legally obligated to pay the money to its shareholders in the form of dividends. And that's how Annaly Capital (NYSE: NLY) is yielding 14.4%.

     Annaly's assets are short-term obligations that mature in less than 10 years, and all are backed by the full faith and credit of the federal government of these United States. If you're looking for a rich, double-digit return -- and the strongest guarantee available, then these shares are for you.

Andy Obermueller does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.