The world is slowly spiraling down into chaos. The nations of the European Union are realizing that sometimes when you borrow money, you actually have to pay it back, and professional hitmen have more job stability than the leaders of the Middle East. The price of oil is all over the place, and the uncertainty has caused similar fluctuations in the stock market. In chaotic times like this, it is a natural reaction to turn to safe assets, despite the weaker return. Unfortunately, the United States Federal Reserve refuses to raise rates, and the returns on US Treasuries and bank CDS are so low, you might as well just be planting your money in the ground and praying a tree grows from it. So what is a cautious investor to do when the stock market is too volatile for comfort and US rates are extremely low? The answer lies across the Pacific. And no, I don’t mean China. I’m talking about short-term Australian Government Bonds.
Six-Times the Return
What would you say if I told you that you could get more than six-times the return on your two-year US treasury with another government’s bond? Your first thoughts would go to debt-ridden nations like Greece and Spain, or to historically unstable counties such as Venezuela, places where there was a legitimate concern that you would never see your money again. Luckily, you don’t have to trust your money to these risky nations to get the solid returns you need. As of March 10th, 2011, the yield on a 2-year Australian bond is 4.92%, more than six times the measly .63% offered by the United States or 1.7% offered by the German government. Even a 30-year US Treasury is only yielding 4.52%. Now I’m a huge proponent of American Supremacy, but even I would admit, it’s far more likely that the US would default on its debt within the next 30 years than Australia will within the next two. A lot of things can happen in the next two years, but it is highly unlikely that the legitimacy of the Australian government will come into Jeopardy, considering the nation has a considerable history of NOT having a revolution every 10-30 years, and is not on any short list of nations to have their debt downgraded in the near future.
What About the FX Risk?
The first concern any investor should have when investing in securities not backed by the same currency they use is the foreign exchange risk, and investing in Australian Dollars is no different. The current FX rate for AUD is 1AUD = $1.0016USD (Bloomberg). The Australian Dollar is pegged to the USD, and therefore has a history of having an exchange rate that is very close to a one-to-one ratio. While history is no indication of future performance, barring runaway inflation (which is not a major concern for Australia), there is very little FX risk in investing in Australian securities at this given time.
If you’re looking for a get rich quick scheme, or are the type of person who believes the world is going to end in 2012, then this may not be the right investment for you. But if you are looking for a safe place to invest some extra cash and want to get a decent return without jeopardizing your retirement plans, then Australian Government bonds are a good place to look.
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