Wednesday, 27 September 2017

In Search of Bond Yields and Safe Haven

In my previous post, I discussed the role of Bonds in mitigating risk in your investment portfolio. In the era of low interest rates, purchasing a Canada 10-year government bond yielding 2.1% is not going to generate the necessary income to survive unless you have several million dollars to invest. Corporate bonds probably pays 1% or more than  government bonds. I then search for other countries government bonds to see what they yield.


The table below shows the yields on 10-year government bonds on September 25. Current yield on Canada is 2.1%. If you invest in U.S. bonds, you get 12 basis point more at 2.22%. Look at Egypt government bond (shaded in blue). It pays a whopping 15.5% or 13.4% more than a Canadian government bond.  In contrast, Switzerland's government is charging you 0.06% (shaded in yellow) to sell you a 10-year bond. What gives??

Here are the possible rationale:

There is rampant inflation in countries such as Egypt, Kenya and Uganda and even Brazil. As such, government has to increase interest rates to curb inflation. Classic economic theory at work.

Weak currency forces countries above to raise interest rates.

Political risk inherent in these countries.

To stimulate domestic economy, government is lowering interest rates. Applies to Switzerland and most countries in the European Union (EU). By lowering rates through monetary policy, it creates a 'disincentive' to invest in fixed income(bonds) and channel funds to other sectors of the economy.


10-Year Govt. Bond Yield Premium/(Discount)
Canada 2.10 0.00
United States 2.22 0.12
Argentina 5.96 3.87
Australia 2.78 0.69
Austria 0.58 -1.52
Belgium 0.70 -1.40
Bostwana 4.55 2.46
Brazil 9.77 7.68
Bulgaria 1.75 -0.35
Chile 4.28 2.19
China 3.62 1.52
Colombia 6.54 4.45
Croatia 2.54 0.44
Czech Republic 1.11 -0.99
Denmark 0.51 -1.59
Egypt 15.45 13.36
Finland 0.57 -1.53
France 0.70 -1.40
Germany 0.40 -1.70
Greece 5.59 3.49
Hong Kong 1.63 -0.46
Hungary 2.58 0.49
Iceland 5.51 3.42
India 6.62 4.52
Indonesia 6.32 4.22
Ireland 0.75 -1.35
Israel 1.73 -0.37
Italy 2.16 0.07
Japan 0.03 -2.07
Kenya 12.88 10.79
Lithuania 0.75 -1.35
Malaysia 3.89 1.79
Malta 1.42 -0.67
Mexico 6.71 4.62
Netherlands 0.52 -1.57
New Zealand 2.97 0.87
Norway 1.57 -0.53
Pakistan 8.25 6.15
Philippines 4.59 2.50
Poland 3.29 1.20
Portugal 2.41 0.31
Qatar 3.34 1.24
Romania 4.01 1.92
Russia 7.60 5.51
Singapore 2.11 0.01
Slovenia 0.98 -1.12
South Africa 8.46 6.36
South Korea 2.30 0.20
Spain 1.62 -0.48
Sweden 0.86 -1.24
Switzerland -0.06 -2.16
Taiwan 1.02 -1.08
Thailand 2.24 0.15
Turkey 10.75 8.66
Uganda 14.95 12.86
United Kingdom 1.33 -0.77
Vietnam 5.38 3.28

One can argue that investing in Mexican bonds should be relatively safe , yielding 6.7%, which is a return most active portfolio managers cam't even achieve. However, one needs to understand that there are several risks such as default risk, currency risk, interest rate risk, liquidity risk and political risk. Even then, purchasing them directly is a problem as you can't just go on  to your broker platform and buy them directly. Most of these government bonds are traded very thinly, even in the domestic market.. The spread between bid and ask can also be quite wide.  U.S. bonds are probably the most liquid in the world. No wonder the Chinese and Japanese governments are the biggest debtholders of Uncle Sam's bonds.

Absent direct investment in the local bond market to obtain higher yields, alternative include investing in ETFs . Two emerging market bond ETF are available on the Toronto Stock Exchange, and both are CAD-hedged include:
  • BMO Emerging Markets Bond Hedged to CAD Index, Yield 4%, symbol:  ZEF
  • iShares USD Emerging Markets Bond Index ETF, Yield 4% symbol XEB
Note that in addition to current yields, the bond ETFs above have also been stellar performers this year by providing total returns in excess of double digits as a result of falling rates and due to demand for them. 

Final caveat, just like any other investments , do your own research before investing.  I also do not own any of the ETF funds mentioned above. 






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