We have identified a short term A rated Bank of America bond denominated in the Brazilian real and achieved a better than 10.50% yield for our clients.
Corporate Bond linked to the Brazilian Real
Bank of America has issued debt, denominated in the Brazilian real, which currently has a yield of about 10.5% for 38 months. The very high yield and short maturity of this Brazil bond, when considered with its solid “A” rating and positioning as one of the “too big too fail” icons within the US financial system, offers an extremely favorable reward to relatively low risk position. We also view the recent drop in the strength of the Brazilian real relative to the US dollar as a great opportunity for increasing exposure to the Brazilian currency within our basket of foreign fixed income holdings, as we believe the dollar’s longer term weakening trend against many of the world currencies remains a major concern for investors seeking protection against its devaluation and a continued erosion of its buying power. In our ongoing effort to address the concerns of our clients in protecting their existing wealth from the destruction caused by the persistent devaluation of the dollar, we believe this Bank of America Brazil bond represents this week’s best opportunity to add the higher yields of one the world’s best emerging economies to our Foreign and World Fixed Income holdings at a quite favorable exchange rate.
Wealth Preservation Concerns
Wealth preservation continues to be the name of the game in the West. In other words, the focus for many people is not to make more money, but to preserve the wealth they already have. Declining equity and property prices, ultra-low interest rates, minimal pay raises, elevated inflation, ineffective politicians, potentially increased taxes, and the constant printing of more money are converging into what appear to be perfect financial storm conditions, where one financial storm after another beats down, eroding away wealth, until the aforementioned conditions finally change. It is, in a manner of speaking, financial hurricane season and we see little change on the horizon for the continued borrowing from tomorrow as means to pay for the lifestyle of today. With US Ten Year treasury yields diving below 2% and inflation rates undaunted, a certain degree of wealth destruction looms on the horizon, even while these T-bills are regarded as being “safe.”
Giving credence to Sam Zell’s earlier warning that Americans should brace for a disastrous 25 percent decline in the standard of living should the U.S. dollar’s reign as the global reserve currency ever end, the Wall Street Journal recently reported “the Congressional Budget Office said it anticipates that the trade-weighted exchange value of the U.S. dollar will decline at a moderate pace over the next 10 years”. Whatever premonition finally enlightens us, a wakeup call is a wakeup call. If any haziness remains, perhaps one should also consider that the CBO noted in the August update of its economic and budget forecast that by this same (trade-weighted exchange) measure, the dollar has been falling for most of the past decade, with the exception of the upturn during the global financial crisis. And, in a further clarification of what they are seeing, it was reported that “So far this year, the dollar has dropped sharply even through the European debt crisis continues to unsettle international financial markets. That fall has prompted questions about whether the status of the dollar as a reserve currency and a safe haven in times of economic crisis has diminished because of investors’ concerns about rising U.S. government debt.”
Here at Durig Capital, we are not asleep at the wheel. In fact, we have undertaken the effort to protect our client’s assets against the persistent destruction associated with an ever increasing supply of US dollars by scouring the globe in search of sound investments in a basket of the strongest global currencies, and it is why we have chosen Bank of America’s very high yield, short term Brazil bond as This Week’s Best Bond.
By far the largest and most populous country in South America, Brazil continues to pursue industrial and agricultural growth and development of its interior. Exploiting vast natural resources and a large labor pool, it has large and well-developed agricultural, mining, manufacturing, and service sectors. It is the world’s largest producer of coffee, sugar and orange juice and the second-largest exporter of iron-ore and soybeans. Brazil’s offshore oil fields have turned it into a net crude exporter, helping it expand its presence in world markets, and its economy outweighs that of all other South American countries.
Brazil’s economy slowed sharply in the second quarter, but domestic demand has remained resilient as consumers have been able to maintain their buying power despite the impact of higher interest rates and stiffer credit terms. That’s because Brazil’s unemployment rate is at record lows, with the tight labor market forcing companies to pay more to attract and keep a burgeoning work force. Despite concern about the impact of slower Chinese growth, Brazil, the world’s eighth-largest economy, is expected to grow more than 4 percent this year (see trade flow chart below.) This robust economic growth underscores the importance of emerging markets as the developed world struggles with a sluggish rebound from the global economic slowdown.
The inflation rate in Brazil was last reported at 7.23 for August, the highest since June 2005 and well above the ceiling of the government’s official year-end target of around 4.5%. Despite continued price pressures in Latin America’s largest economy, the Brazilian Central Bank shifted course at its meeting last week to cut interest rates because of concerns about global economic growth. While many economists share the government’s belief that inflation will eventually trend back toward the 4.5% target, the rate cut could prolong the time for that to happen.
Stanford University has rated the Brazilian economy number #10 on its global Sovereign Fiscal Responsibility Index, a placement significantly above #28 ranked (out of 34) United States.
About Bank of America
Bank of America continued to support the U.S. economic recovery by extending approximately $147 billion in credit to consumers, small businesses, large companies and others during the second quarter of 2011, approximately $3 billion more than the previous quarter. In fact, Bank of America serves one out of every two U.S. households with checking, savings, credit and/or home loans, and is one of the world’s largest financial institutions.
Bank of America reported a second quarter loss (in line with previous estimates), with results driven by charges related to the recently announced agreement to resolve nearly all of the legacy Countrywide-issues, as well as the impact of other mortgage-related costs. These charges were partially offset by lower credit costs, gains from the sale of non-core assets and debt securities, improved sales and trading revenues and higher asset management fees and investment banking fees.
Bank of America has continued to strengthen their balance sheet, reporting over $600 billion in cash, which is well in excess of its net charge offs of $11.6 billion for the last 6 month, down from over $20 billion during the same time period in 2010. Risk-weighted assets declined $41 billion and global excess liquidity increased $16 billion from the end of the first quarter of 2011, to $402 billion at June 30, 2011. Regulatory capital ratios finished above the company’s prior guidance with the Tier 1 common equity ratio at 8.23 percent at June 30, 2011. More recently in the news was B of A’s agreement to sell their 13.1 billion share stake in China Construction Bank for $ 8.3 billion, Berkshire Hathaway (lead by famous investor Warren Buffet)’s large equity investment of $5 Billion (in 6% preferred dividend shares), and all the associated blessings that the Oracle of Omaha can bring.
|3 Year Bonds||Yield||Country Fiscal Ratings||Currency||Ratings|
|US Treaasury||00.33%||28 of 34||US Dollar||AA+,AAA,AAA|
|Bank of America||10.00%||10 of 34||Brazil Real||A, A2, A+|
This is a yield pickup of well over 9% when compared to corresponding US Treasuries, which gives this Bank America Brazil bond nearly a double digit positive accrual rate. Even if the Congressional Budget office is wrong and we have strong appreciation in the dollar, as long as the currency appreciation averages less than 9% annually relative to the real this bond would still outperform the 3 year US Benchmark bond. However, if the CBO is correct, and should the US currency decline instead of gain that same 9% annually, that much appreciation of the real would result in a 19% annual return.
Please compare this Brazilian Linked Bank of American Bonds to our Australian Bank of American bond of shorter maturity.
The default risk is Bank of America’s ability to perform. Given Berkshire Hathaway’s recent commitment to them of 5 billion dollars and their agreement to sell 13.1 billion shares of China Construction Bank for an after-tax gain of 3.3 billion, both of which helped improved their balance sheet and significant cash position relative to debt, it is our opinion that the default risk for this short term bond is minimal relative to the currency risk of the Brazilian real.
The currency risk of the Brazilian real could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to the Brazilian economy.
Many people ask, how do I invest in Brazilian Corporate bonds? With most firms it often requires an institutional sized single bond purchase. To circumvent this constraint and allow greater diversification, we at Durig Capital combine world bond buyers into a larger institutional sized purchase. In our previous syndicates, we were able to facilitate purchases as low as $10,000 US Dollar and should be able to do the same for your interest.
We hope NOT to see any further destruction of wealth resulting from a constant decline in the US dollar relative other global currencies as forecast by the Congressional Budget Office, and we acknowledge that a strengthening of the US dollar would directly reduce the total returns of this Brazilian real denominated bond. On the other hand, should the US dollar continue on the long term path of devaluation that it has been on, this alone could add quite significantly to the already highly positive accruing returns of this bond, not to mention the possible stellar returns that would result should the US dollar ever loose its domineering status as the world’s reserve currency and collapse against a basket of other stronger currencies.
Considering Brazil’s prominent position as a leading emerging market economy, stable political system, and solid growth prospects in spite of broader global slowdowns, we view the gaining of nearly three times the yield (and 4% above that of negotiated by Warren Buffet) as an incredibly compelling reason for choosing BAC’s Brazilian real bond over their similar maturity Yankee (US dollar) bond. The combination of offering a remarkably high yield, some protection against a further loss of wealth with a continuation of the US dollar’s weakness against the real, and a diversification away from heavily overweighted US dollar based assets into one of the world’s top emerging markets is why we are adding it at this time to our Foreign and World Fixed Income holdings.
To know more about this Bank of American bond call our fixed income specialist at 971-327-8847.
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