Outsourcing your government bond purchases?

If you are looking to invest, international bonds are an interesting investment. Stocks can crash, and stock markets are intrinsically unstable. Long term bonds on the other hand fluctuate with interest rates. Buying long term bonds is a type of financial gambling, but if those bonds are a mixture of international bonds with different maturity dates managed by a professional company, does that make them safer? In my opinion, there is still risk, but a whole lot less risk in that case.

One interesting thing I noticed is that the “safe” countries to invest in are not necessarily that safe. The United States has a relatively low rate of return on bonds, yet we came close to defaulting on bond payments during our government shut-down. Other wealthy countries have low long term bond rates of about 4% or less. In the long run, the debt ratio of these countries could get out of hand, long before your maturity date!

When my investor friend goes out with an older woman, he calls it a “Maturity date.”

Risky countries might not be as risky as people think as well. Look at Kenya, Brazil, South Africa, and Russia. They have long term bond rates from 7% to 12%. When was the last time they defaulted? How high are their debt ratios (not high at all). Do these countries have much civil unrest? Africa used to be a very unstable place twenty years ago, but recently, there are relatively few coups, riots, and rebel uprisings. Somalia seems to be lagging behind from this point of view. Egypt has some serious recent uprisings. Kenya had a small massacre. But, compared to twenty years ago, Africa is safe enough to merit more investment than it gets. Brazil and Russia have their share of trouble, but they are not countries that are going to go under either.

On a more confusing note, look at Iceland and Greece. They were going bankrupt a few years ago, and now you just don’t hear about them in the news. What happened? Their interest rates on long term bonds are around 6-8% which is a lot less than many other countries that never came close to default.

The moral of the story is that we live in a confusing world. If you buy bonds and interest rates go up, you will lose principal. But, if your bonds are overseas, their interest rates in the respective countries might not go up when America’s does which gives you more of a hedge against market instability. Good luck!

(1) International bonds might be stable when stocks crash. A great diversification!

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