Tuesday, November 30, 2010

Global Bonds & The Income Investor

Global Bonds are enticing because Income investors must chase yield to survive. Low risk income does not exist today and one can understand the allure of global bonds. However, we income investors, with few rich cash flow opportunities must be careful to evaluate the risk of our loaning our money.

My job is to teach you about income investing and bonds should play a role. Global bonds with their high yields are indeed enticing. We know that US bonds are way too expensive. Quality corporate bonds are also expensive. One could argue that municipal bonds are on sale but only if you are sure the taxpayer will pay that bill.

Global bonds need to be evaluated with the same prism for all bonds. All bonds have at least two risks. One risk is will the issuer pay back your principal. For instance, I loaned money to GM General Motors and with all my experience, I was very sure that even in a bankruptcy situation, some of my principal would be return but that is not to be. You must answer this question. Do you think a foreign backed bond with a higher yield than you can get in the U.S. will pay back your principal?

Another risk is ability to pay the interest. Interest coverage ratio is a very transparent measure to determine if a corporation has enough income to pay the interest on their debt. Global bonds have the same responsibility but less transparency. Basically the question is, do you think Global bond issuers which may be governments or companies will create enough income to pay you interest on the money you loaned them.

A third risk exists for global bonds and that is currency risk. You do not have to be a global economist to understand the value of the dollar varies in relation to the Euro and other currencies. Do you lend them dollars in exchange for Euros or other currency?

Simple investing means you reduce your risk to the fewest number of issues and for my money global bonds have one more risk than I need to take.

I always recommend going with what you know. If you know currency exchanges and foreign companies and governments and you do your research and then find a bond you love, go for it.

For me, I will wait until bonds provide a better value. In the mean time it is dividend machines and covered calls for my income portfolio.

Very Truly Yours,