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The World's Best Deal In Government-Guaranteed Income

By Dr. Steve Sjuggerud
Wednesday, November 9, 2005

Government-issued bonds paying 9%, with the potential for much more

Iceland is full of surprises...

Like the time I went for a long walk in the capital city, Reykjavik...and saw salmon swimming in the streams. Or flying there in January, without bringing a winter coat. Or standing with one foot in America and one foot in Europe (geologically speaking) in Iceland’s Thingvellir valley, which is also the birthplace of democracy.

Because the country always surprises me, it’s really one of my favorite places in the world to visit. You must go, if you get the chance.

Things are surprisingly good in Iceland now. You might be surprised to learn Icelanders enjoy the world’s longest life expectancy, and one of the world’s highest incomes per person. Crime is non-existent. It’s probably because everyone has a job... unbelievably less than 3,000 people in the entire country were unemployed in the third quarter of 2005.

The thing is, things are actually too good in Iceland right now. The central bank is getting scared. And it’s giving us the opportunity for double-digit profits in government bonds.

With the exception of Ireland, Iceland has the world’s fastest growing developed economy. With that, real estate prices have soared in Reykjavik. The rise in home prices has been almost comical:

Housing price Index

Between soaring home prices and soaring oil prices (among other soaring prices) inflation is now a major risk in Iceland.

Iceland has had serious trouble with inflation in the past. So its Central Bank is absolutely committed to never seeing it again.

The problem is, inflation is appearing. Forecasts from the major brokerage firms suggest inflation will hit 5% in 2006. That’s unacceptable to the Central Bank. So they’re raising rates like Greenspan never did... The Central Bank has already raised short-term interest rates to over 10% in Iceland. And some forecast the Central Bank may raise short-term rates as high as 12% in 2006. Wow!

This creates our last surprise... the incredible opportunity in Icelandic bonds. No doubt, some DailyWealth readers may be familiar with this idea... but right now, Icelandic bonds are the world’s best opportunity in government-guaranteed income.

The very best buy in my opinion, is a little complicated to explain. But the profit potential is so large, it’s worth understanding, so bear with me a bit...

The bonds to buy for the biggest profits are Iceland’s inflation-indexed bonds. These bonds pay you interest (around 4%), PLUS they pay you back inflation as well (which is forecast to be 5% in 2006).

When you add up the interest (4%) and the inflation payback (5%), these bonds will likely pay 9% total interest in 2006. Let me say that again...government-issued bonds from a AA-rated country are paying 9%.

It’s just gotten silly. With the exception of Australia (at 2.5%), there’s no country in the world with an inflation-indexed bond paying you more than 2% (plus inflation), as the chart here shows:

International real yield

But in Iceland, things have gotten silly. Lately, investors have avoided the long-term bonds paying 9%. They’ve been attracted to the short-term interest rates near 10%. It’s driven the yields on the inflation-indexed long-term bonds up to all-time records. Look at the incredible rise since September:

Housing Financing Fund (HFF bonds)

It’s time to buy long-term inflation-indexed bonds in Iceland. You’ll get paid 9% in interest (4% interest, plus 5% inflation payback). But that 9% isn’t even what excites me...

What excites me is the capital gains potential, as long-term interest rates in Iceland return to earth from these record levels. As interest rates come down, the value of a bond goes up. The more long-term the bond, the higher the capital gain will be.

That’s why we’re buying Icelandic bonds in True Wealth. To learn more about them, an excellent website to check out is www.bonds.is

You can buy these bonds directly in Iceland. Or you can buy them in the U.S., as there are only a couple U.S. brokers I’m aware of that can easily trade these. If you’re a subscriber to True Wealth, you’ll find the names in the back of the October 2005 issue of True Wealth....

If you’re not interested in these bonds, you should at least consider visiting Iceland... No doubt, you’ll be pleasantly surprised.

Good investing,

Steve





Market Notes


THE RISE OF THE DOLLAR

The U.S. dollar hit a two-year high against the euro on Tuesday.

Rumor has it Warren Buffett is feeling the pain…and has covered a substantial portion of his famous currency bet against the greenback.

TOLL BROTHERS GETS HAMMERED

After cutting its 2006 outlook, luxury homebuilder Toll Brothers (NYSE: TOL) dropped 12% on Tuesday. Toll is down 40% from its July 2005 high.

Other real estate stocks down at least 25% from their 2005 highs:

D.R. Horton (NYSE: DHI)…down 26%

NVR, Inc. (AMEX: NVR)…down 26%

Consolidated Tomoka (AMEX: CTO)…down 34



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