Guest Post: The Case for Buying Foreign Bonds from Low-Deficit Countries

Washington’s Blog.

Bill Gross is recommending that investors buy the debt of low-deficit countries. Via Business Week:

As Pacific Investment Management Co.’s Gross, manager of the world’s biggest bond fund, said yesterday in an interview with Tom Keene on Bloomberg Radio that [U.S.] “bonds have seen their best days.” Pimco, which announced in December that it would offer stock funds, is advising investors to buy the debt of countries such as Germany and Canada that have low deficits and higher- yielding corporate securities.

Similarly, the Mad Hedge Fund Trader writes:

I am constantly asked where to find safe places to park cash by investors understandably unhappy with the risk/reward currently offered by the markets. Any reach for yield now carries substantial principal risk, the kind we saw, oh say, in the summer of 2007.

I have had great luck steering people into the Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY) for the last nine months, which is invested primarily in the debt of Asian and Latin American government entities, and sports a generous 6.44% yield. This beats the daylights out of the one basis point you currently earn for cash, the 3.76% yield on 10 year Treasuries, and still exceeds the 4.70% yield on the iShares Investment Grade Bond ETN (LQD), which buys predominantly single “BBB”, or better, US corporates.

The big difference here is that PCY has a much rosier future of credit upgrades to look forward to than other alternatives. It turns out that many emerging markets have little or no debt, because until recently, investors thought their credit quality was too poor. No doubt a history of defaults in the region going back to 1820 is in the backs of their minds.

You would think that a sovereign debt fund would be the last place to safely park your money in the middle of a debt crisis, but you’d be wrong. PCY has minimal holdings in the Land of Sophocles and Plato, and very little in the other European PIIGS. In fact, the crisis has accelerated the differentiation of credit qualities, separating the wheat from the chaff, and sending bonds issues by financially responsible countries to decent premiums, while punishing the bad boys with huge discounts. It seems this fund has a decent set of managers at the helm.

With US government bond issuance going through the roof, the shoe is now on the other foot.

It should be noted that both Gross and the Hedge Trader are rather bullish on the U.S. economy. For example, one of the main reasons that Gross is now bearish on U.S. treasuries is because he is convinced the U.S. be hit with massive inflation. If he is wrong – and wrong deflation reins for a while longer – then U.S. treasuries may still recover.

As to foreign sovereign debt, Ferguson, Faber and Grice apparently don’t think that any country is safe. If they are right, that could argue for gold.

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander…


  1. Greg Merrill

    I already spoke to one etf complex about this very ideas; creating a fundamental international bond etf of low deficit & low debt / gdp countries. This would sell well right now.

  2. ndk

    I disagree with all of them. I (still) like long Treasuries and the USD.

    I’m not bullish on the US economy, and I don’t believe we have successful reflation in place. Personal incomes are still dropping, and unemployment isn’t getting any better. The Z.1 shows the only credit growth in America is coming from the Feds, and there’s growing political pressure to curb that borrowing.

    We’re still pegged to China, and I don’t believe that China is suffering significant inflation in goods and services. Indeed, they can’t suffer inflation faster than the US, since they don’t really have any profit margins. There is absolutely no way they’re going to appreciate. There never was. They’re going to act as is in China’s best interest, even if there is a prisoner’s dilemma here. We’ve given them plenty of reasons to feel uncooperative, from Xinjiang to Tibet to Taiwan to Google to the open threats and demonization in the media daily.

    As the USD appreciates against other currencies, there’s more deflationary pressure in America and, by extension, China and other peggers.

    And I don’t believe for a moment the strawman trade war proposals set forth by Krugman and others can take hold. Even the liberals on Krugman’s columns are shredding him. Have you read the comments section lately? It’s hilarious entertainment.

    I’ve wondered whether the US strategy to force China to break the peg is to do everything in their power to create sufficient inflation in China that China screams Uncle Sam. I don’t think we can do it.

  3. i on the ball patriot


    Indeflation is a deflective game,
    It keeps the marks minds turning,
    The central banks have lit the fire,
    The economies all are burning,

    Vanilla greed is on the ropes,
    Pernicious greed now in control,
    A two tier world of ruler and ruled,
    The ruling elite’s sadistic goal …

    Deception is the strongest political force on the planet.

  4. Cathryn Mataga

    The currency peg is just too abstract a
    concept for the American left to get all
    worked up about. Really, they need
    something a bit more anthropomorphic. If
    he wants a trade war with China, he’s
    better off finding some mistreated
    child somewhere or maybe some tiger bone
    medicine to rally the masses.

    Not that this is a great idea in the first
    place. I think most people, these days,
    instinctively sense that pissing off China
    is not a great plan at this time.

    1. ndk

      I don’t know whether it was flippant or not, I think your point about the basic emotional response is extremely perceptive. Not only is China powerful; not only are we trained from birth not to piss off our creditors; but I am very, very tired of our government creating enemies around the world.

      I don’t like being hated everywhere I go. I don’t believe our values are universally correct or superior or applicable(wasn’t this Boas’ school’s major point? How did the neocons and neolibs forget this one so quickly?). I don’t want to attempt to force others to let us partially or fully dodge our obligations incurred.

      Finally, China became extremely successful as compared to America over a period when the peg was fixed, and even with some serious appreciation thrown in for good measure. If the peg were the fundamental problem, we wouldn’t have that trajectory. We’re being outcompeted, and we need to become more efficient and effective. Convincing the Chinese to let us devalue our way out of the hole a little bit doesn’t help that.

      1. Iconoclast

        ndk,you are correct in your recollections of Boas and his many minions. However, they were the bunch that set up the social chaos we currently enjoy: cultural relativity, bigtime (think the recent massacre in Texas, courtesy of Major Hasan; not profiling Muslims or anyone of obvious Middle Eastern extraction, etc.) There are, IMHO, some real cultural absolutes which are moral imperatives as well, eg: don’t marry off a prepubescent child for money, and watch her die or be horribly maimed giving birth eventually, say, at age 11…this is a commonplace in parts of Africa. Don’t expose female babies at birth (common still in China)…See?
        It’s really not that hard…

        1. craazyman

          Yes it’s like a comet. The Gnostic Comet orbits our tribe-mind in a long ellipse, and when it flashes its bright tail in our sky and illuminates the Dark Death Star of Thanatos we want to send in the Marines.

          Can’t say I blame us either.

          Just wish we were somehow better at it than we are.

  5. Florin

    I continue to be amazed how much free airtime Gross gets.
    How soon have we forgotten all those internet-bubble analysts who were just pimping stocks. Sure, now we require them to disclose if they own specific stocks. Yet when Gross talks his bond book, a lot of people take it as gospel and keep spreading it as such

  6. craazyman

    I like the thesis but it’s not the 10-bagger I’m looking for — unless you’re investing in the home currencies and the dollar really tanks. I just don’t see that, though. Can’t work though this rationally. Just need to jump the equations and go for it.

    I was watching Kapstone Paper at 1 and change when it was on the Nasd. Now it’s at 12+ on the NYSE. A ten-bagger in less than 1-year! I knew it was coming, but I couldn’t force myself to take the big risk when it was primed for entry. Want to spend my days in an absinthe bar in Paris with mind altering stimulants. I’ve had it completely with Western Civilization and don’t want to work another day.

    Sincerely yours,
    Mr. Barnaby Franklin Lascaux
    Curator of the Walls
    Motel 6, Sunnyside, Queens

      1. ndk

        And we know it, and the world will provide plenty of examples for us over the next decade. I suspect the UK would be particularly jarring. When we see these examples that strike very close to home, we’ll pull back.

      2. NotTimothyGeithner

        Yes, but if America is the next Greece, that means a collapse of the international order. At that point, only countries where your worth as a member of the mob really matter.

        The implications of a defaulting U.S. and the end of the (if not free trade) open trade policies of the British and then American Empires are staggering.

  7. Dave of Maryland

    Increasingly my eyes glaze over when I see posts like this. People are loosing their homes, going bust from medical bills, are clearly starving for money & we have to be worried about where to park excess dough? This is, like, an important thing?

    Here in Bel Air, we’ve recently lost two supermarkets, right in the downtown area. One of them in particular is an empty eyesore, as it sits smack at the main crossroads. I’ve thought about bashing a credit card or two, buying a dozen used sewing machines, hiring a dang good seamstress from a local dry cleaner, maybe finding someone who can tart up off-the-rack patterns, and a couple of sharp guys to take samples around to get preliminary orders.

    In other words, set up a local dress shop. It ain’t hard. In six months, have a full order book & a dozen people sewing away. I’ve got my eye set on the old Super Fresh spot. Get the local county government to bend zoning to let me rent out a corner of it. Put a big sign over it: The New Bel Air Industrial Park. Show that there are jobs. Any idiot can set up a dress shop.

    And I could do the whole thing on the credit cards I’ve got in my pocket at the moment. Including the one I’m nearly ready to default because my bookstore just isn’t pulling its weight anymore.

    Why not invest the money to make jobs here? What’s your excuse? What’s so dang special about low deficit countries that’s more important than rebuilding America? We got the money. You said so.

  8. sam hamster

    The U.S. has a vulnerable bond market, but also the greatest capacity to re-establish confidence via our Internal Revenue Service. And we all know that the carpetbaggers’ bags are full!

    Come on, where is that good-old American, populist spirit?

    1. ndk

      Wait a minute… I think you might be on to something.

      If we can just convince China to give the I.R.S. extraterritorial jurisdiction over the mainland, then we can solve our debt problem, China’s inflation and reserves problem, and all without any RMB appreciation.

      It’s just clever enough to work…

  9. bob

    Mad hedge fund trader is a complete joke. Breakfast with MI6, Lunch with the CIA and Dinner with God.

    Pimco talks their book more than El-Erian tries to sell his.

  10. i on the ball patriot

    Some comments appear to be missing/deleted — what’s up with that?

    Deception is the strongest political force on the planet.

    1. i on the ball patriot

      My mistake … wrong thread … my bad … humble apologies to the gracious host …

Comments are closed.