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-guaranteed return of 6.5% on an international bond (offered by the government of a country).
-The bond is sold in US dollars.
The bond is sold or issued in US dollars? Or both?
As far as I know, only the US Treasury issues US securities and dollars as the sovereign issuer (some countries use the USD as their domestic currency, but they are not the original USD issuer).
Any government of a country issuing/selling bonds in USD cannot guarantee anything in USD (e.g. Argentina, Venezuela, Ecuador, El Salvador, Russia, Thailand, or whoever).
Is the bond insured? Who insures it? What exactly and substantially is this "guarantee"? Are you going to "guarantee" it in your prospectus? Out of your pocket?
I wouldn't touch it unless maybe it was UK, Germany or Switzerland (and I don't think they have any need to issue bonds in USD) or a supra-national entity like the IMF or BIS where the US has significant weight.
Perhaps you are not familiar with HY bond investing...
I am - somewhat (but I trade on a longer term basis - don't buy and hold forever). But I'm far from an expert - as you can tell from my discussion of 144A bonds below.
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...Liquidity can be managed by making sure the investor has enough liquid assets to cover emergencies, down markets, etc. I do that and I am sure anyone who understands HY bonds does also...
The kind of liquidity I'm talking about is the liquidity of the underlying mutual fund or ETF - not the liquidity of the individuals investing in them. Something like this:
Mutual fund investors have in the past stampeded out of funds - including bond funds - during downturns. And - when they stampede out - the stampede causes additional downward price pressure on the underlying markets. Bonds tend to be fairly illiquid to start with. So liquidity issues can arise when a large number of investors decide to hit the exits at the same time.
Being curious - I took a look at the top holdings of VWEAX. A lot seem to be 144A bonds. I had no idea what 144A bonds were (did you?) - had never heard of them before - so I looked them up. Turns out 144A bonds are restricted corporate securities that can only be sold to "qualified institutional buyers" (QIBs). No individual - no matter how rich - can buy these bonds directly. The rules were designed to protect individual investors:
Several thoughts/questions immediately popped into my mind. First - it doesn't seem logical to me that an individual investor - especially a small one - can buy something indirectly through a mutual fund that he/she wouldn't be allowed to buy directly. Second - how do you come up with a daily NAV for a fund when some/many of its holdings only trade every third Thursday and the bid/ask spreads can be very wide/huge? Guess you can use a computer model - but they're not particularly accurate (based on the computer model estimates I get on my brokerage statements for some thinly traded bonds I own). Third - what happens when individual investors decide to dump these funds (and it really is a question of "when" - not "if")? Who will buy these bonds (keeping in mind that only QIBs can buy them)? When mom and pop decided to dump their muni bond funds after the Meredith Whitney scare - people like me could go to E*Trade and buy them. Took a few weeks for "small fry" like me (and other buyers) to absorb the excess inventory - but there are natural buyers for high quality munis - especially at "distress sale" prices. Who are the natural buyers for these 144A issues?
Overall - this looks like an accident waiting to happen. Can't say it will happen. Only that the potential is there. Also important - I don't think the average mutual fund buyer has a clue what he/she is buying when he/she buys a fund like VWEAX. Or similar (I doubt Vanguard is the only mutual fund company that is holding 144A bonds).
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Hmm. Not really. Return is return. There may be some tax issues if held in a taxable account (LTCG are taxed differently than interest), but the same is true for any bond fund.
Not really. There's a difference between regular interest income (which is regular) - and capital gains distributions (which are irregular and unpredictable) and an especially big difference between the first two and a return of principal (which is a return of your own money). I tend to doubt you'll run across the third except once in a blue moon in an open end mutual fund - but they're not uncommon in closed end mutual funds. Robyn
Well are we back testing now? Past performance what? Let's not falling into hypocrite status. Fwiw vweax out performed the hy category during the down turn and after
Back testing? No. Just looking at a price movement in the past. FWIW - back testing is:
Backtesting is the process of applying a trading strategy or analytical method to historical data to see how accurately the strategy or method would have predicted actual results.
The bond is sold or issued in US dollars? Or both?
As far as I know, only the US Treasury issues US securities and dollars as the sovereign issuer (some countries use the USD as their domestic currency, but they are not the original USD issuer).
Any government of a country issuing/selling bonds in USD cannot guarantee anything in USD (e.g. Argentina, Venezuela, Ecuador, El Salvador, Russia, Thailand, or whoever).
Is the bond insured? Who insures it? What exactly and substantially is this "guarantee"? Are you going to "guarantee" it in your prospectus? Out of your pocket?
I wouldn't touch it unless maybe it was UK, Germany or Switzerland (and I don't think they have any need to issue bonds in USD) or a supra-national entity like the IMF or BIS where the US has significant weight.
These are bonds that are sold by foreign entities. They're commonly called "Yankee bonds":
Yankee bonds are bonds issued in the U.S. bondmarket by a foreign entity, and they are denominated in U.S. dollars. Governments, companies, and other entities issue Yankee bonds.
That's what I'm talking about. Where is the "guarantee"?
Argentina, for example, regularly defaults on dollar-denominated bonds, along with some others in the past, present, and no doubt in future.
Again, maybe a supra-national entity like the IMF or BIS has a credible guarantee.
I do not know of a bond fund that specializes in specifically and exclusively in supra-national entity dollar-denominated bonds, but that would be interesting.
Back testing? No. Just looking at a price movement in the past. FWIW - back testing is:
Backtesting is the process of applying a trading strategy or analytical method to historical data to see how accurately the strategy or method would have predicted actual results.
What is the difference between back testing and reviewing past performance? Not much because back testing is simply creating the past performance to then review
These are bonds that are sold by foreign entities. They're commonly called "Yankee bonds":
Yankee bonds are bonds issued in the U.S. bondmarket by a foreign entity, and they are denominated in U.S. dollars. Governments, companies, and other entities issue Yankee bonds.
They eliminate currency risk for dollar denominated investors - but not other risks - like credit quality risk. Robyn
Exactly what Robin said bale. The bond is issued and sold in US dollars. This eliminates in my opinion the biggest unpredictable risk of investing in foreign government bonds.
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Originally Posted by bale002
That's what I'm talking about. Where is the "guarantee"?
Argentina, for example, regularly defaults on dollar-denominated bonds, along with some others in the past, present, and no doubt in future.
Again, maybe a supra-national entity like the IMF or BIS has a credible guarantee.
I do not know of a bond fund that specializes in specifically and exclusively in supra-national entity dollar-denominated bonds, but that would be interesting.
Yes Argentina has and still look at the demand for their garbage:
The bond I'm talking about is not from a super entity, its a country. And they have never defaulted on their bond debts. If Argentina's bond demand is so high even after their history; I have no reason to believe that the demand for this bond I'm selling would be low. In fact, Argentina is a special case. Sovereign debt default is not as common as most people assume. So the risk related to a bond through default on debt is minimal. Especially if you do a through analysis of the country you are investing in.
Btw you confused my fee structure a bit. I'm charging 1% of the 6.5% interest the bond earns a year. Meaning if someone invested $10K the bond would earn them $650/year. I would take $100 of that. So I would certainly make money while not drowing the investor with fees. So the ER is .93%. However, this wouldnt be a typical ER because the fund would be designed in a way where I never take any ER out of the principle invested. ER would only be charged on the interest.[/QUOTE]
That is a fee of about 15% of income. Or 1% of the value of the investment. I guess as interest rates increase and the value of the bond decreases you do pretty good with your fee based on income and not market value. The fee seems too high to me.
Exactly what Robin said bale. The bond is issued and sold in US dollars. This eliminates in my opinion the biggest unpredictable risk of investing in foreign government bonds.
Yes Argentina has and still look at the demand for their garbage:
The bond I'm talking about is not from a super entity, its a country. And they have never defaulted on their bond debts. If Argentina's bond demand is so high even after their history; I have no reason to believe that the demand for this bond I'm selling would be low. In fact, Argentina is a special case. Sovereign debt default is not as common as most people assume. So the risk related to a bond through default on debt is minimal. Especially if you do a through analysis of the country you are investing in.
I am not asking about demand, I am asking about the "guarantee" (your word in post #1). Now you say risk of default is "minimal". Which is it? Is the credit risk "guaranteed" or is it "minimal"? It can't be both. If it is "guaranteed", who, specifically, "guarantees" it?
From an SEC webpage on fraud:
Quote:
Be mindful of “guaranteed” returns. Every investment carries some degree of risk, and the level of risk typically correlates with the return an investor can expect to receive. Low risk generally means low yields, and high yields typically involve higher risk. Fraud promoters often spend a lot of time trying to convince investors that extremely high returns are “guaranteed” or “can’t miss.” Don’t believe it. High returns represent potential rewards for investors who are willing and financially able to take big risks.
By the way, your grammar and spelling do not inspire confidence in a "guarantee" or "minimal risk" accompanied by promises of high return.
Give him some credit for the grammer. After all he is a nigerian prince.
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