We have identified a very short term A rated Bank of America bond denominated in the Australian dollar and are targeting a better than 7.00% yield for our clients.
Corporate Bond linked to the Australian Dollar
Bank of America has issued debt, denominated in the Australian dollar, which currently has a yield of about 7.0% for 24 months. The high yield and very short maturity of this Aussie bond, when considered with its solid A rating and good cash position, compares extremely favorably in relationship to other high yield instruments in our Foreign and World Fixed Income holdings, and we consider the recent dip in the strength of the Aussie dollar a great opportunity for increasing exposure to the Australian currency in our basket of foreign fixed income holdings. We believe the dollar’s longer term weakening trend against many world currencies remains a major concern for investors seeking protection against its devaluation and a further erosion of its buying power, and we share the concern of our clients in protecting existing wealth by utilizing the higher yields of sound issuers in many the world’s strongest economies.
Wealth Preservation Concerns
Wealth preservation now appears 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. Few of us would disagree that the excessive borrowing from tomorrow as means to pay for the lifestyle of today becomes increasingly untenable when the production of tomorrow slows and threatens to contract from the production of today. A country that produces less must eventually consume less, and the value of its land and companies will also axiomatically become worth less. With the Consumer Price Index climbing towards 4%, wealth destruction is appearing on almost every front, as the real value of everything is falling by that same amount. At only a 25% tax rate, accounts must pay over 5% just to make any real return against a 4% CPI, which is increasingly difficult to achieve.
Earlier this year, billionaire real-estate magnate Sam Zell warned 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 ended. While we don’t see a viable contender replacing the US dollar in this role, it’s the actual need for any currency to be designed a “reserve currency” that appears the most vulnerable. (Zell also points out that our Consumer Price Index tends to hide inflation by counting depressed home prices at 42 percent of the index, and suggests that if we adjusted the CPI to reality we’d probably be looking at between 5 and 7 percent inflation.)
Other pundits (such as Ray Dalio, CIO of Bridgewater Associates, and Bill Gross, of bond giant Pimco) agree with Zell that the dollar’s world dominance will soon fade. In any event, we here at Durig Capital have undertaken the effort to protect our client’s assets against the persistent destruction associated with an ever increasing supply of federal 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 high yield, very short term Aussie bond as This Week’s Best Bond.
Australia’s abundant and diverse natural resources include extensive reserves of coal, iron ore, copper, gold, natural gas, uranium, and renewable energy sources. It also has a large services sector and is a significant exporter of natural resources, energy, and food. Key tenets of Australia’s trade policy include support for open trade and the successful culmination of the Doha Round of multilateral trade negotiations, particularly for agriculture and services.
The Australian economy grew for 17 consecutive years prior to the global financial crisis. Subsequently, the Rudd government introduced a fiscal stimulus package worth over US$50 billion to offset the effect of the slowing world economy, while the Reserve Bank of Australia cut interest rates to historic lows. These policies – and continued demand for commodities, especially from China – helped the Australian economy rebound after just one quarter of negative growth. The economy grew by 1.2% during 2009 – the best performance in the OECD – and by 3.3% in 2010. Unemployment peaked at 5.7% in late 2009 and fell to 5.1% in 2010. As a result of an improved economy, the budget deficit is expected to peak below 4.2% of GDP and the government could return to budget surpluses as early as 2015.
Although Australia has experienced persistent deficits since World War II, the estimated 2010 deficit of $30.4 billion, a mere 2.46% of GDP, bringing the total outstanding public debt to 22.4 % of GDP (2010 est.) The 2010 inflation rate stood at 2.9%, with current unemployment rates about 5.1%. Exports exceeded imports to the tune of 10.3 billion, with partners China, Japan, South Korea, and India all listed ahead of the US. The longer term outlook remains good as Australia’s terms of trade appear to have reached record peaks with prices for key export commodities staying high thanks to voracious demand from China and the rest of Asia.
Public debt to GDP
Australia in A$
A$ 20.3 billion
United States in USD
|100.0 %||US$ 1.294 Trillion||1.28 Trillion||1.94 Trillion|
Stanford University has rated the Australian economy number #1 on its global Sovereign Fiscal Responsibility Index. This recognition helped highlight how much stronger Australia’s financial condition is compared to #28 ranked (out of 34) United States, which came in only four points above a defaulted Iceland.
Australian dollars (AUD) per US dollar –
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.
The company continued to strengthen the balance sheet with risk-weighted assets declining $41 billion, and global excess liquidity increasing $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.
Bank of America’s debt is solid Investment grade quality, being A rated by S&P, A2 by Moody’s, and A+ by Fitch.
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 greatly improved their balance sheet and financial strength, it is our opinion that the default risk for this short term bond is minimal relative to the currency risk of the Aussie dollar.
The currency risk of the Aussie dollar could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to the Australian economy.
Many people ask, how do I invest in Australian 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, especially anything similar to the 25 % that Sam Zell recently forecast, and we acknowledge that a strengthening of the US dollar would directly reduce the total returns of this Aussie bond. Conversely, if the US dollar continues on the long term path of devaluation that it has been on, this alone would add significantly to the already highly positive accruing returns of this bond, not to mention the possible stellar returns that would result if Sam Zell major worry about the significant loss in the US standard of living came to pass.
Considering Australia’s long term position as a stable economy and political system with shrew fiscal management will likely correlate with a stable and possible strengthening of the commodity based Australian dollar relative to the US dollar, we view the gaining of nearly twice the yield (and 1% above that of negotiated by Warren Buffet) as an incredibly compelling reason for choosing BAC’s Aussie dollar bond over their similar 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 Aussie dollar, and a diversification away from heavily overweighted US dollar based assets into one of the world’s top tier fiscally conservative countries is why we are adding it at this time to our Foreign and World Fixed Income holdings.
Disclosure: Durig Capital clients may currently own these Bank of America bonds.
To know more about this Bank of America bond call our fixed income specialist at 971-327-8847.
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