Australian bonds

[scandal 951]

By Jeffrey R. Kosnett, Kiplinger's

3:10 p.m. CDT, September 23, 2010

There's a parallel universe where the economy is strong, the unemployment rate is a mere 5 percent, and the dollar is sound. The inhabitants speak English, buy big houses, love their SUVs and can invest with Fidelity, Pimco and Vanguard.

Oh, and by the way, two-year government notes yield a sweet 4.5 percent, and online banks will offer as much as 6 percent to get your money.

Personal finance fantasyland? No, it's Australia, where savers not only speak in endearing slang but have it better than their counterparts in any other developed nation. That news is spreading among jealous Americans, who would love to go hunting for Aussie Treasury bonds. In fact, Australia offers American investors a two-fer: a good yield and an appreciating currency backed by a growing economy.

Well, is this as real as it seems? And is it practical? The answers are yes, it's a wonderful investment idea, and no, those bountiful Aussie yields are all but out of reach for the typical U.S.-based investor.

When one nation's interest rates are significantly higher than those of its peers, it typically is a sign of economic trouble. It usually means a country has to offer above-average interest rates to attract capital.

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But resources-rich Australia is wealthy and getting wealthier. It benefits from the sale of iron ore, coal, liquefied natural gas and other materials to China at ever-higher prices. It also exports food and machinery to all of Asia, including booming India and Singapore. Australia runs a trade surplus with the rest of the world, so its government has no need to borrow vast amounts of money, as the U.S. and many European nations must.

Australia's biggest concern is inflation, which has been running at a relatively high 3.1 percent annual rate. The nation's central bank is seeking to contain pricing pressures through a policy of tight money, which entails raising short-term interest rates. That, in turn, fosters a strong Australian dollar. Today, it costs 89 American cents to buy one Aussie. Last year, you could have bought an Aussie for 70 U.S. cents. A strengthening Aussie is a good thing for Americans with money invested in Australia because their investment gets translated into more U.S. bucks.

Australian yields should maintain their advantage over U.S. yields even if rates here rise, said Roger Bridges, head of fixed income for Tyndall Investment Management, a mutual fund firm in Sydney. Interest rates are elevated in his country, he said, because big Australian industries such as mining require a lot of capital. They obtain that capital by borrowing from banks, often at stiff rates of 7 percent to 9 percent, or by selling bonds.

Government bond yields are also up. A two-year Australian bond pays 5 percent, which means Australians can get generous yields without risking their principal by holding long-term bonds, which can lose a considerable amount of value if interest rates rise.

Can you really not take part?

If you're gobsmacked, you're not alone. I'm writing about this subject because I've received repeated inquiries from Americans eager to own Australian debt, either directly or through funds. Alas, if you want to play Australian yields directly, you may have to emigrate. After speaking with a number of Australian bond managers, I get the sense that this state of affairs is just fine with them. The nation doesn't want, nor does it need, hot money from all over the world.

No one — not Fidelity, not Vanguard, not Pimco, not anyone else — offers 100 percent Australian income funds in the U.S. Brokers in the U.S. require large orders — $100,000 at Fidelity and Schwab — before they will find you any individual foreign bonds. Australia's Reserve Bank sells new government bonds in lots as small as $1,000, but you need to send the money in Australian dollars directly from an Australian bank.

Banks make it hard for an individual foreigner to open a deposit account from afar unless you're applying for residency. Instead, you must travel to Australia to open an account at a bank or an Australian mutual fund. Rules for the funds say applications must be "signed and delivered" inside the country. Non-residents face withholding taxes on distributions as high as 45 percent, although you can get back the amount withheld from the Internal Revenue Service by filing for a foreign tax credit.

That leaves Americans who aren't interested in moving across the Pacific Ocean with few appealing options. One is to invest in global income funds. The problem is that none offer full Aussie content. International bond funds from Loomis Sayles and Franklin Templeton contain just a smidgen of Australian issues. And Rydex offers CurrencyShares Australian Dollar Trust ETF (FXA), an exchange-traded fund designed to approximate an ultra-short-term bond fund, but it yields 2.7 percent.

The best bet is Aberdeen Asia-Pacific Income (FAX), a closed-end fund that has more than 40 percent of its assets in Australia, including state and national government bonds and some corporate debt. The fund's monthly distributions work out to an annual rate of 6.4 percent, with about one-third of the payouts representing a tax-deferred return of capital. And Asia-Pacific's long-term record is excellent, though keep in mind that the fund uses leverage and that it's more of a bet on all Asian bond markets and currencies than a side door into Australia.

At some point an Australian bank or mutual fund company could launch a U.S. retail operation.

"We haven't really thought about a distribution strategy in the U.S.," said Jeff Brunton, head of credit markets for AMP Capital Investors, a Sydney-based firm that manages $96 billion (Australian) and offers some of the nation's best-rated funds.

Brunton is pleasantly surprised to hear that individual Americans know about his country's sound economy and high yields. "You'd have done very well" investing in Australian debt, he confirms.

If only he and his fellow Australians would make it easier for us yield-starved Americans to do so.

—Distributed by Tribune Media Services

[Ban Hammer 13,656]

By Jeffrey R. Kosnett, Kiplinger's

3:10 p.m. CDT, September 23, 2010

There's a parallel universe where the economy is strong, the unemployment rate is a mere 5 percent, and the dollar is sound. The inhabitants speak English, buy big houses, love their SUVs and can invest with Fidelity, Pimco and Vanguard.

Oh, and by the way, two-year government notes yield a sweet 4.5 percent, and online banks will offer as much as 6 percent to get your money.

not news. booyah's been telling us that for years.

[Pooky 3,844]

not news. booyah's been telling us that for years.

So Booyah was right?

Man, that's going to annoy a LOT of people

[slim 1,533]

What happens when China takes over AUS?

[scandal 951]

What happens when China takes over AUS?

Shrimps on the barbie will be served with soy sauce and eaten with chopsticks?

[Ban Hammer 13,656]

Shrimps on the barbie will be served with soy sauce and eaten with chopsticks?

it's bound to make races more interesting.

[thongd4me 69]

Shrimps on the barbie will be served with soy sauce and eaten with chopsticks?

Australians will have to drive on the right hand side of the road and whorehouses will have signs like in another thread here.

[Darnell 8,479]

What happens when China takes over AUS?

Many 'financial folk' claim this is already happening -

many 'real estate deals' have 'financial backing' from chinese companies and chinese 'foreign investors'. Not controlling interest, but enough of the pie that it's more than noticeable.

This seems to be (IME) part of a 10 year plan, with that last-year of the 10 year plan being THIS year.

[Heracles 417]

Many 'financial folk' claim this is already happening -

many 'real estate deals' have 'financial backing' from chinese companies and chinese 'foreign investors'. Not controlling interest, but enough of the pie that it's more than noticeable.

This seems to be (IME) part of a 10 year plan, with that last-year of the 10 year plan being THIS year.

China is using their federal buying power to buy out the world. Not a bad strategy if you ask me, as when the right time comes, they will privatize them. By then, China will have built Goliath companies domestically and own a hell of a lot of companies abroad.

Slim types assume China will make the same mistakes the Ruskis made and put their eggs into Military. Wrong! China is diversifying abroad and ultimately investing in China to build up China. China is smarter than their shoot-from-the-hip Ruski partners and learned from their devastating mistakes.

Ultimately China is using the weakness of our pro-individualistic system, anti-big government attitude to their advantage and clearly doing so successfully.

Edited September 27, 2010 by Heracles

[thongd4me 69]

China is using their federal buying power to buy out the world. Not a bad strategy if you ask me, as when the right time comes, they will privatize them. By then, China will have built Goliath companies domestically and own a hell of a lot of companies abroad.

Slim types assume China will make the same mistakes the Ruskis made and put their eggs into Military. Wrong! China is diversifying abroad and ultimately investing in China to build up China. China is smarter than their shoot-from-the-hip Ruski partners and learned from their devastating mistakes.

Ultimately China is using the weakness of our pro-individualistic system, anti-big government attitude to their advantage and clearly doing so successfully.

Very well put. We live in a "me! me! me!" era where government, under the banner of promoting

high ideals and social equality, is just giving too much special consideration to individuals and

groups of individuals, specifically through the tax code. The Chinese while having a much

larger population, think as one when they compete in the world, much like the US during

WWII where everybody willingly gave up personal advantages and conveniences for the common

goal of winning the war. This is a different kind of war.

[Heracles 417]

Very well put. We live in a "me! me! me!" era where government, under the banner of promoting

high ideals and social equality, is just giving too much special consideration to individuals and

groups of individuals, specifically through the tax code. The Chinese while having a much

larger population, think as one when they compete in the world, much like the US during

WWII where everybody willingly gave up personal advantages and conveniences for the common

goal of winning the war. This is a different kind of war.

It's the oldest trick in the book really. Use your nemesis's stubbornness and weakness to your advantage. Most superpowers throughout history fell because of this. Ironically they are using a form of capitalism against the US that we simply cannot compete with; as it would go against the anti-big / government sucks mindset.

Individualism is great and I will be the first to speak up for it, yet like anything in life, you need a happy medium. As you point out, when a country works towards a common goal [as the US did many decades ago], where everyone works as a team and crutch, we all do well. It's no coincidence that the US's decline in Q.O.L correlates with the rise in to-each-their own attitudes. This community spirit is a fundamental aspect of Canada, Australia and most other first world countries.

While we here are fragmented and ever so trying to outdo one another, even if it means sabotage, China is working as a team to propel and excel their country. Using their many hands [in sync] to build their emerging country; brick by brick; student by student; billion dollar infrastructure project by project.

Edited September 28, 2010 by Heracles

[DEDixon 39]

All well and good for China, however what is China going to do when the sh@t hits the fan? I mean, when their people demand more rights and all things American or AUS? They will eventually have a lot to deal with internally. Currently they can ignore demands from their people, but with so many people, the people will eventually have power to demand better everything at home. Just imagine if 10 million people get mad and camp out on highways or major down town areas to stop production. China won't be able to get away with another tiananmen square.

[Pooky 3,844]

Just imagine if 10 million people get mad and camp out on highways or major down town areas to stop production.

Aren't they already doing this, albeit on an involuntary basis? Or did they finally clear the 10-day traffic jam?

[DEDixon 39]

Aren't they already doing this, albeit on an involuntary basis? Or did they finally clear the 10-day traffic jam?

i didn't read on the traffic jam (ignored it). was it a protest?

Edited September 28, 2010 by DEDixon

[Pooky 3,844]

i didn't read on the traffic jam (ignored it). was it a protest?

No, it was an actual traffic jam.

WSJ link