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Emerging market offers among the highest bond yield, how can we profit from that?
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Loading...Government bonds in emerging markets account for 60% of all securities offered by these countries. Argentina, Chile and Brazil are among the largest issuers of government bonds and at the same time offer the highest profit. The reason for this is the large liquidity of these countries. The rise in government bonds of developing countries is due to the rising interest rate on a global scale.
What does this mean for us and how can we make a profit?
The bond is a debt book that is issued by a country or other institution (corporations). Government bonds are considered to be one of the safest ways of "capital insurance" due to the low volatility and practically the extremely difficult default of the security (default means the issuer can not pay the investor the interest on the bond).
Why is it hard to get to default? In developed countries (US, Canada, UK, Germany etc) bond yields are very low. The reason why, if investors want an extremely passive investment, they will not get big profits in return. For example, if bond yields are 30% and stock market funds make an average of 20% at risk of losing funds, why do investors want to invest in the funds? They will not want. In order to default the government bond, the issuer (in this case the country), practically should declare bankruptcy, which is quite a rare occurrence.
Why do countries issue bonds? It's simple .. looking for capital. In order to attract capital, countries issue shares. The more capital they need, the more likely they are to offer higher returns. Emerging markets are willing to issue bonds with higher yields because they are in much more difficult situation than developed countries. The economic situation of these countries, infrastructure reforms, improving health care, improving the education system. These are just a few of the serious problems facing emerging markets.
How can we profit from this? The first and easiest way we can think of is buying such bonds. The problem is that they are not sold in units but blocks. The normal small investor does not have enough the capital to buy such a block (eg 2,000,000 bonds each at $10). The other profit alternative comes from looking at the sectors in a given country and judging where the money is most likely to be "poured". We identify a company that is likely to fulfill the given government order and we are looking forward to developments. For example, Brazil has managed to sell 10 million bonds each 10$ (equivalent to USD to avoid the transition complication). We look at the sectors in the country and we estimate that the country's infrastructure around coffee crops is in a bad state (keep in mind that Brazil is one of the largest coffee producers, and when we talk about crops, we mean an area with the size of Bulgaria). We decide to see which construction companies operate in this sector and who are the most likely recipients of the optimization contract for the infrastructure node in the region. Once we see the company, we try to read as much information as possible before deciding to wait, buy or continue the search for another company.
Trader Bozhidar Arabadzhiev
Varchev Traders Read more:
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