How To Get 11.6% in a 4% World
By Dr. Steve Sjuggerud
May 9, 2007
Man, let me tell you, countries like Italy and Spain sure got a free ride...
The euro officially started on January 1, 1999. When the euro came along, Italy and Spain got the chance to trash their currencies and replace them with what was basically Germany's currency. It was much more stable and came with much lower interest rates.
In the mid-1990s, it didn't seem possible that Italy and Spain could have low interest rates. Italy and Spain never had strong currencies. The Italian lira was a chronic loser. Interest rates in Italy and Spain were usually very high. They had to be in order to attract investors and compensate them for taking a risk in owning their currency.
But that's exactly what happened.
As the chart below shows, as the introduction into the euro approached on January 1, 1999, interest rates in Italy and Spain fell from about 11% down to about 4%.
Next up was Greece. Greece was such a disaster it simply wasn't allowed to join the club on the first go around in 1999. Greece had to wait two years to get in.
What happened to Greek interest rates in the few years leading up to joining the euro was exactly the same as what had happened a few years before in Italy and Spain. Interest rates went from sky high down to 4%, in line with German levels.
The next countries to join the euro will be a handful of Eastern European countries, like Poland. Oh, will you look at that? The same pattern is emerging... interest rates have gone from sky-high down toward euro levels... but Poland is not part of the euro yet.
You see the pattern... As soon as it's clear that a country is giving up its little currency in favor of the euro, interest rates in that country converge to euro levels and whoever holds that country's long-dated bonds makes a fortune. As interest rates fall, those high-yielding bonds become incredibly attractive to investors.
Last spring, Iceland's prime minister predicted that Iceland would become a full member of the European Union by 2015... and adopt the euro as its currency. No one paid attention to the speech... even though it could hold the key to thousands of percent in profits.
You see, if Iceland's leader is right, owners of Icelandic bonds – particularly long-dated bonds – will make an absolute fortune as Iceland's interest rates fall into line with its euro partners.
Right now, Iceland has some bonds that mature all the way out to 2044. If we buy now, it looks like these bonds will pay us 11.6% interest for the next 35 years. If long-term interest rates in Iceland fall to euro levels of around 4% and you have a bond that pays you 11.6% until 2044, then that bond will be worth a lot of money. People will pay you a heck of a lot of money to get your 11.6% bond in a 4% world.
I recently advised subscribers of my newsletter – True Wealth - to purchase long-dated Icelandic bonds... and I still believe they're one of the best investments you can make this decade. If you'd like to know where to buy them, you should consider coming onboard...
Good investing,
Steve
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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