What stops you from using fixed income in developing countries?How can I invest in country A to take advantage of their great interest rate while I live in country B?Would high interest rates offset the issue of keeping money in a weak currency?What are some examples of “fixed income” investments?Is a book from 2005 about fixed income securities obsolete, or still relevant?What is the difference between fixed-income duration and equity duration?Using the Rule of 72 to compute residual income?What are the contents of fixed annuities?I'm not broke, but I'm feeling stuck on a fixed incomeHow much would I need to save to keep a fixed income consistent?Fixed Income Portfolio
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What stops you from using fixed income in developing countries?
How can I invest in country A to take advantage of their great interest rate while I live in country B?Would high interest rates offset the issue of keeping money in a weak currency?What are some examples of “fixed income” investments?Is a book from 2005 about fixed income securities obsolete, or still relevant?What is the difference between fixed-income duration and equity duration?Using the Rule of 72 to compute residual income?What are the contents of fixed annuities?I'm not broke, but I'm feeling stuck on a fixed incomeHow much would I need to save to keep a fixed income consistent?Fixed Income Portfolio
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I was recently visiting a developing country and I noticed that their interest rates are very high ~15% with government bonds promising ~13% annually. I was just thinking, if the bid ask spread for that currency with the USD is B/A respectively, then what is stopping people from having B/A x (1+13%)-1 annual USD returns which roughly turned out to be 8%. 8% for fixed income in USD is very high, but I don’t quite see the problem in my argument assuming the currency value with respect to Usd stays stable in that year.
interest-rate fixed-income
asked 8 hours ago
AspiringMatAspiringMat
1162 bronze badges
add a comment |
I was recently visiting a developing country and I noticed that their interest rates are very high ~15% with government bonds promising ~13% annually. I was just thinking, if the bid ask spread for that currency with the USD is B/A respectively, then what is stopping people from having B/A x (1+13%)-1 annual USD returns which roughly turned out to be 8%. 8% for fixed income in USD is very high, but I don’t quite see the problem in my argument assuming the currency value with respect to Usd stays stable in that year.
interest-rate fixed-income
asked 8 hours ago
AspiringMatAspiringMat
1162 bronze badges
3
"assuming the currency value with respect to Usd stays stable". But is that a valid assumption?
– RonJohn
7 hours ago
Nitpick: Your use of B/A assumes the holding period is exactly 1 year. If it were shorter, then B/A would have a greater effect on annualized return, and vice versa.
– nanoman
6 hours ago
1
Possible duplicate of How can I invest in country A to take advantage of their great interest rate while I live in country B?
– Chris W. Rea
5 hours ago
Possible duplicate of Would high interest rates offset the issue of keeping money in a weak currency?
– Dheer
47 mins ago
add a comment |
I was recently visiting a developing country and I noticed that their interest rates are very high ~15% with government bonds promising ~13% annually. I was just thinking, if the bid ask spread for that currency with the USD is B/A respectively, then what is stopping people from having B/A x (1+13%)-1 annual USD returns which roughly turned out to be 8%. 8% for fixed income in USD is very high, but I don’t quite see the problem in my argument assuming the currency value with respect to Usd stays stable in that year.
interest-rate fixed-income
asked 8 hours ago
AspiringMatAspiringMat
1162 bronze badges
I was recently visiting a developing country and I noticed that their interest rates are very high ~15% with government bonds promising ~13% annually. I was just thinking, if the bid ask spread for that currency with the USD is B/A respectively, then what is stopping people from having B/A x (1+13%)-1 annual USD returns which roughly turned out to be 8%. 8% for fixed income in USD is very high, but I don’t quite see the problem in my argument assuming the currency value with respect to Usd stays stable in that year.
interest-rate fixed-income
interest-rate fixed-income
asked 8 hours ago
AspiringMatAspiringMat
1162 bronze badges
asked 8 hours ago
AspiringMatAspiringMat
1162 bronze badges
asked 8 hours ago
AspiringMatAspiringMat
1162 bronze badges
asked 8 hours ago
AspiringMatAspiringMat
1162 bronze badges
asked 8 hours ago
AspiringMatAspiringMat
1162 bronze badges
1162 bronze badges
3
"assuming the currency value with respect to Usd stays stable". But is that a valid assumption?
– RonJohn
7 hours ago
Nitpick: Your use of B/A assumes the holding period is exactly 1 year. If it were shorter, then B/A would have a greater effect on annualized return, and vice versa.
– nanoman
6 hours ago
1
Possible duplicate of How can I invest in country A to take advantage of their great interest rate while I live in country B?
– Chris W. Rea
5 hours ago
Possible duplicate of Would high interest rates offset the issue of keeping money in a weak currency?
– Dheer
47 mins ago
add a comment |
3
"assuming the currency value with respect to Usd stays stable". But is that a valid assumption?
– RonJohn
7 hours ago
Nitpick: Your use of B/A assumes the holding period is exactly 1 year. If it were shorter, then B/A would have a greater effect on annualized return, and vice versa.
– nanoman
6 hours ago
1
Possible duplicate of How can I invest in country A to take advantage of their great interest rate while I live in country B?
– Chris W. Rea
5 hours ago
Possible duplicate of Would high interest rates offset the issue of keeping money in a weak currency?
– Dheer
47 mins ago
3
3
"assuming the currency value with respect to Usd stays stable". But is that a valid assumption?
– RonJohn
7 hours ago
"assuming the currency value with respect to Usd stays stable". But is that a valid assumption?
– RonJohn
7 hours ago
Nitpick: Your use of B/A assumes the holding period is exactly 1 year. If it were shorter, then B/A would have a greater effect on annualized return, and vice versa.
– nanoman
6 hours ago
Nitpick: Your use of B/A assumes the holding period is exactly 1 year. If it were shorter, then B/A would have a greater effect on annualized return, and vice versa.
– nanoman
6 hours ago
1
1
Possible duplicate of How can I invest in country A to take advantage of their great interest rate while I live in country B?
– Chris W. Rea
5 hours ago
Possible duplicate of How can I invest in country A to take advantage of their great interest rate while I live in country B?
– Chris W. Rea
5 hours ago
Possible duplicate of Would high interest rates offset the issue of keeping money in a weak currency?
– Dheer
47 mins ago
Possible duplicate of Would high interest rates offset the issue of keeping money in a weak currency?
– Dheer
47 mins ago
add a comment |
2 Answers
2
active
oldest
votes
Because currency risk is not the only risk in this scenario. The risk of the developing country (the state) not servicing their obligations are the bigger risk, hence the very high interest rates.
Think of it as investing in High Yield bonds (junk bonds) - interest is high because risk is high.
Rating agencies rate countries (like they do corporations) for this exact reason.
answered 8 hours ago
ssnssn
6013 silver badges8 bronze badges
2
This answer might apply for developing country bonds denominated in major currencies. But OP seems to refer to the local currency, of which the country is the sovereign issuer. Thus, it seems more likely that the country would resort to "printing money" to pay off bonds, rather than default outright. This takes the problem back to currency risk.
– nanoman
6 hours ago
@nanoman but currency risk can be negated or close to eliminated by various financial instruments.
– ssn
6 hours ago
2
Currency hedging is not free; it generally costs the difference in the sovereign interest rates. Eliminating currency risk also eliminates the excess return.
– nanoman
5 hours ago
add a comment |
assuming the currency value with respect to USD stays stable in that year.
This is where your analysis breaks down. The fact that the foreign bond pays a higher interest rate indicates that the currency will weaken relative to the dollar over the year, otherwise many investors would buy these bonds as an arbitrage opportunity, driving the price (and yield) up to match USD bonds.
In theory, the interest rate of risk-free (i.e. government) bonds should reflect the inflation expectations over that period. So governments bonds that offer high interest-rates in their own currency indicate that inflation is expected to be high over that period, so buying them over the USD should be roughly a wash - meaning that if you buy these bonds you'll earn a high interest ate but when you exchange them back to dollars you should expect to get the same return as if you bought US bonds.
answered 3 hours ago
D StanleyD Stanley
62.5k10 gold badges178 silver badges187 bronze badges
add a comment |
2 Answers
2
active
oldest
votes
2 Answers
2
active
oldest
votes
active
oldest
votes
active
oldest
votes
Because currency risk is not the only risk in this scenario. The risk of the developing country (the state) not servicing their obligations are the bigger risk, hence the very high interest rates.
Think of it as investing in High Yield bonds (junk bonds) - interest is high because risk is high.
Rating agencies rate countries (like they do corporations) for this exact reason.
answered 8 hours ago
ssnssn
6013 silver badges8 bronze badges
2
This answer might apply for developing country bonds denominated in major currencies. But OP seems to refer to the local currency, of which the country is the sovereign issuer. Thus, it seems more likely that the country would resort to "printing money" to pay off bonds, rather than default outright. This takes the problem back to currency risk.
– nanoman
6 hours ago
@nanoman but currency risk can be negated or close to eliminated by various financial instruments.
– ssn
6 hours ago
2
Currency hedging is not free; it generally costs the difference in the sovereign interest rates. Eliminating currency risk also eliminates the excess return.
– nanoman
5 hours ago
add a comment |
Because currency risk is not the only risk in this scenario. The risk of the developing country (the state) not servicing their obligations are the bigger risk, hence the very high interest rates.
Think of it as investing in High Yield bonds (junk bonds) - interest is high because risk is high.
Rating agencies rate countries (like they do corporations) for this exact reason.
answered 8 hours ago
ssnssn
6013 silver badges8 bronze badges
2
This answer might apply for developing country bonds denominated in major currencies. But OP seems to refer to the local currency, of which the country is the sovereign issuer. Thus, it seems more likely that the country would resort to "printing money" to pay off bonds, rather than default outright. This takes the problem back to currency risk.
– nanoman
6 hours ago
@nanoman but currency risk can be negated or close to eliminated by various financial instruments.
– ssn
6 hours ago
2
Currency hedging is not free; it generally costs the difference in the sovereign interest rates. Eliminating currency risk also eliminates the excess return.
– nanoman
5 hours ago
add a comment |
Because currency risk is not the only risk in this scenario. The risk of the developing country (the state) not servicing their obligations are the bigger risk, hence the very high interest rates.
Think of it as investing in High Yield bonds (junk bonds) - interest is high because risk is high.
Rating agencies rate countries (like they do corporations) for this exact reason.
answered 8 hours ago
ssnssn
6013 silver badges8 bronze badges
Because currency risk is not the only risk in this scenario. The risk of the developing country (the state) not servicing their obligations are the bigger risk, hence the very high interest rates.
Think of it as investing in High Yield bonds (junk bonds) - interest is high because risk is high.
Rating agencies rate countries (like they do corporations) for this exact reason.
answered 8 hours ago
ssnssn
6013 silver badges8 bronze badges
answered 8 hours ago
ssnssn
6013 silver badges8 bronze badges
answered 8 hours ago
ssnssn
6013 silver badges8 bronze badges
answered 8 hours ago
ssnssn
6013 silver badges8 bronze badges
6013 silver badges8 bronze badges
2
This answer might apply for developing country bonds denominated in major currencies. But OP seems to refer to the local currency, of which the country is the sovereign issuer. Thus, it seems more likely that the country would resort to "printing money" to pay off bonds, rather than default outright. This takes the problem back to currency risk.
– nanoman
6 hours ago
@nanoman but currency risk can be negated or close to eliminated by various financial instruments.
– ssn
6 hours ago
2
Currency hedging is not free; it generally costs the difference in the sovereign interest rates. Eliminating currency risk also eliminates the excess return.
– nanoman
5 hours ago
add a comment |
2
This answer might apply for developing country bonds denominated in major currencies. But OP seems to refer to the local currency, of which the country is the sovereign issuer. Thus, it seems more likely that the country would resort to "printing money" to pay off bonds, rather than default outright. This takes the problem back to currency risk.
– nanoman
6 hours ago
@nanoman but currency risk can be negated or close to eliminated by various financial instruments.
– ssn
6 hours ago
2
Currency hedging is not free; it generally costs the difference in the sovereign interest rates. Eliminating currency risk also eliminates the excess return.
– nanoman
5 hours ago
2
2
This answer might apply for developing country bonds denominated in major currencies. But OP seems to refer to the local currency, of which the country is the sovereign issuer. Thus, it seems more likely that the country would resort to "printing money" to pay off bonds, rather than default outright. This takes the problem back to currency risk.
– nanoman
6 hours ago
This answer might apply for developing country bonds denominated in major currencies. But OP seems to refer to the local currency, of which the country is the sovereign issuer. Thus, it seems more likely that the country would resort to "printing money" to pay off bonds, rather than default outright. This takes the problem back to currency risk.
– nanoman
6 hours ago
@nanoman but currency risk can be negated or close to eliminated by various financial instruments.
– ssn
6 hours ago
@nanoman but currency risk can be negated or close to eliminated by various financial instruments.
– ssn
6 hours ago
2
2
Currency hedging is not free; it generally costs the difference in the sovereign interest rates. Eliminating currency risk also eliminates the excess return.
– nanoman
5 hours ago
Currency hedging is not free; it generally costs the difference in the sovereign interest rates. Eliminating currency risk also eliminates the excess return.
– nanoman
5 hours ago
add a comment |
assuming the currency value with respect to USD stays stable in that year.
This is where your analysis breaks down. The fact that the foreign bond pays a higher interest rate indicates that the currency will weaken relative to the dollar over the year, otherwise many investors would buy these bonds as an arbitrage opportunity, driving the price (and yield) up to match USD bonds.
In theory, the interest rate of risk-free (i.e. government) bonds should reflect the inflation expectations over that period. So governments bonds that offer high interest-rates in their own currency indicate that inflation is expected to be high over that period, so buying them over the USD should be roughly a wash - meaning that if you buy these bonds you'll earn a high interest ate but when you exchange them back to dollars you should expect to get the same return as if you bought US bonds.
answered 3 hours ago
D StanleyD Stanley
62.5k10 gold badges178 silver badges187 bronze badges
add a comment |
assuming the currency value with respect to USD stays stable in that year.
This is where your analysis breaks down. The fact that the foreign bond pays a higher interest rate indicates that the currency will weaken relative to the dollar over the year, otherwise many investors would buy these bonds as an arbitrage opportunity, driving the price (and yield) up to match USD bonds.
In theory, the interest rate of risk-free (i.e. government) bonds should reflect the inflation expectations over that period. So governments bonds that offer high interest-rates in their own currency indicate that inflation is expected to be high over that period, so buying them over the USD should be roughly a wash - meaning that if you buy these bonds you'll earn a high interest ate but when you exchange them back to dollars you should expect to get the same return as if you bought US bonds.
answered 3 hours ago
D StanleyD Stanley
62.5k10 gold badges178 silver badges187 bronze badges
add a comment |
assuming the currency value with respect to USD stays stable in that year.
This is where your analysis breaks down. The fact that the foreign bond pays a higher interest rate indicates that the currency will weaken relative to the dollar over the year, otherwise many investors would buy these bonds as an arbitrage opportunity, driving the price (and yield) up to match USD bonds.
In theory, the interest rate of risk-free (i.e. government) bonds should reflect the inflation expectations over that period. So governments bonds that offer high interest-rates in their own currency indicate that inflation is expected to be high over that period, so buying them over the USD should be roughly a wash - meaning that if you buy these bonds you'll earn a high interest ate but when you exchange them back to dollars you should expect to get the same return as if you bought US bonds.
answered 3 hours ago
D StanleyD Stanley
62.5k10 gold badges178 silver badges187 bronze badges
assuming the currency value with respect to USD stays stable in that year.
This is where your analysis breaks down. The fact that the foreign bond pays a higher interest rate indicates that the currency will weaken relative to the dollar over the year, otherwise many investors would buy these bonds as an arbitrage opportunity, driving the price (and yield) up to match USD bonds.
In theory, the interest rate of risk-free (i.e. government) bonds should reflect the inflation expectations over that period. So governments bonds that offer high interest-rates in their own currency indicate that inflation is expected to be high over that period, so buying them over the USD should be roughly a wash - meaning that if you buy these bonds you'll earn a high interest ate but when you exchange them back to dollars you should expect to get the same return as if you bought US bonds.
answered 3 hours ago
D StanleyD Stanley
62.5k10 gold badges178 silver badges187 bronze badges
answered 3 hours ago
D StanleyD Stanley
62.5k10 gold badges178 silver badges187 bronze badges
answered 3 hours ago
D StanleyD Stanley
62.5k10 gold badges178 silver badges187 bronze badges
answered 3 hours ago
D StanleyD Stanley
62.5k10 gold badges178 silver badges187 bronze badges
62.5k10 gold badges178 silver badges187 bronze badges
add a comment |
add a comment |
3
"assuming the currency value with respect to Usd stays stable". But is that a valid assumption?
– RonJohn
7 hours ago
Nitpick: Your use of B/A assumes the holding period is exactly 1 year. If it were shorter, then B/A would have a greater effect on annualized return, and vice versa.
– nanoman
6 hours ago
1
Possible duplicate of How can I invest in country A to take advantage of their great interest rate while I live in country B?
– Chris W. Rea
5 hours ago
Possible duplicate of Would high interest rates offset the issue of keeping money in a weak currency?
– Dheer
47 mins ago