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Tax time is rolling around. And it's one more time when I'm
reminded about how much I pay -- and potentially still owe
-- the government. So I thought this was a fitting time to
turn the tables -- and get a government to pay me for
awhile.
I could ask the U.S. government to pay me, but it wouldn't
be that impressive a paycheck. The yield on the 10-Year U.S.
Treasury note is only 3.7%. Luckily, I don't have to settle
for that. After all, a lot of other countries issue debt.
And because of the scary headlines about government debt,
now may be a good time to jump in.
Government bonds are relatively safe compared with other
types of debt. Companies and individuals can go bankrupt.
But because governments have taxing authority, they can
usually meet their debt obligations, come hell or high
water. And no country wants to default, as it would shatter
its credit rating and raise the cost of future borrowing.
That being said, some governments have defaulted. Russia
defaulted on $73 billion of debt back in 1998 -- causing the
currency to plunge more than -70% and forcing the country to
pay a +7.5% premium on newly issued debt. In 2001, Argentina
defaulted on $82 billion of debt, crippling its economy for
years. Peru, Ecuador, Moldavia, and Uruguay are also among
the handful of countries that have had issues paying back
government-issued debt in the last 30 years.
Lower Default Risk
But even accounting for these well-known defaults, the
sovereign debt default rate is still far below that for
corporate debt. 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, compared with the corporate
investment-grade default rate of 2.008%. Even speculative
sovereign debt had a default rate nearly -30% lower than
sub-investment grade corporate debt.
In fact, the sovereign default rate is so low, sometimes its
true risk gets underestimated. Ratings agencies and debt
insurers can get complacent, especially when assessing the
risks of default from developed, and economically "more
stable" countries. This can result in debt that isn't
accurately priced for its risk. And when investors aren't
being properly compensated for their risk -- that's a
problem.
Greece is in hot water. The country's debt grew so large
that investors began to worry about a potential government
default. Other European Union members like Portugal and
Spain also have monumental debt burdens.
So why is this good news for prospective sovereign debt
buyers?
Safer Risk-vs.-Return Environment for Investors
It means that everyone is examining sovereign debt with a
fine-toothed comb. It improves the chances that debt is
being properly priced for its risk. And it means investors
are being appropriately paid for their risk.
It reminds me a little of the 80's movie, The World
According to Garp. The main character, played by Robin
Williams, and his wife are shopping for a house. As they
stand outside a prospective home, a small plane flies into
the house. Williams immediately says, "We'll take the house.
Honey, the chances of another plane hitting this house are
astronomical. It's been pre-disastered. We're going to be
safe here."
While sovereign debt isn't necessarily "pre-disastered" from
default, the risk that it is overpriced or underinsured is
lower today than before the scary headlines started hitting
the newsstands.
For investors, the world of sovereign debt was all but
closed just a few years ago. However, thanks to the
proliferation of exchange-traded and closed-end funds,
buying into the sovereign debt of everywhere from Thailand
to Turkey is now as simple as buying a few shares on the
NYSE.
And the yields are downright mouth-watering. In the March
issue of my
Daily Paycheck
newsletter, I took the opportunity to add two new funds to
my portfolio that are focused on sovereign debt. Among the
picks -- a closed-end fund yielding 8.8%. This yield is high
for a sovereign debt fund, but it's not unheard of.
An added bonus? Most of the funds investing in sovereign
debt pay income monthly -- a nice treat for us income
investors.
Good Investing!
Amy Calistri
Chief Investment Strategist --
The Daily Paycheck
P.S. -- I mentioned above a closed-end fund yielding
8.8%. I added 250 shares of this pick to my Daily Paycheck
portfolio on Monday afternoon. I invite you to learn more about
subscribing by
visiting this link.
Once a subscriber, you too can read the entire profile of this
high-yield pick in my March issue.
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