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DOMESTIC, MUNICIPAL BONDS & V E R Y SELECTIVE FOREIGN BONDS


In this current global economic situation, a good case can be made for investing in diversified foreign bond funds ( US dollar hedged as well as unhedged ) and / or diversified, domestic municipal bond funds. These types of bonds can assist your equity portfolio performance through diversification and decreased capital downside risk. First of all, bonds can provide a nice income stream. I believe that currently, diversified muni. funds and diversified foreign bond funds have a better risk / reward ratio as opposed to corporate debt. Make sure you stay diversified and take costs and length until maturity into consideration. Why US municipal bonds? Taxes, Taxes and Taxes. Diversified domestic muni. bonds have inherent federal and sometimes state tax advantages. These muni. bonds are especially favorable to upper tax bracket investors .

Why foreign bond funds? Well, this is when all that ” global perspective stuff  ” comes into play. They may be a little riskier than domestic munis, but they can provide diversification an possible comparable performance to current volatile equities. The idea is to separate irrational fear and market psychology from sound reason and potential opportunity to find out where opportunites exist in the global markets. Be VERY particular in regards to which diversified groups of countries you would be willing to invest in for a foreign diversified bond fund. Here are some guidlines.

First of all, some ” non-rich ” countries have more stable currencies than ” rich countries ” because their populations have been saving more, their economies have been less leveraged, and some countries have had to take more conservative fiscal policy steps over the last 5+ years. Second, many of these ” non-rich ” countries have been developing quasi-capitalistic market structures with greater GDP growth potential. This is a  B I G  deal. The greater the country’s GDP growth, everything else being equal, the less likely the country’s bonds will default.  Next … Some of these countries are leveraging their domestic natural resources very efficiently with technology and their market reforms. Very key point as well. Most natural resources are likely climb in value in the medium term as the global economy slowly recovers, as a global population rises, and as the average global citizens’ wealth rises as a whole.

Now let’s take a brief look at current global geopolitics and macroeconomic issues. In the global  financial markets, most all countries are increasingly more dependent on one another. TREND. Many rich countries  ( world leaders generally ) literally can not afford to let most ( but not all ) countries melt down financially … that is how intertwined international business interests have become over the last 5+ years. Many of these ” non -rich ” countries that are / have developed somewhat of a quasi – capitalistic market structure ( TREND ) are inherently improving the wealth of their population as well as helping to stabilize their country’s political structure. They look at the USA, Singapore and other rich countries as an initial economic model from with to build from. In the current geopolitical landscape, it always helps if your country is on good terms with the United States as well as other rich countries. This helps you militarily… which helps you stabilize politically ….. which helps you with international trade, which helps you, as a country, become a more stable economy ( maybe not always in that order ).

There is a current, REALISTIC, inherent lack comparable systemic risk in diversified muni bond funds as well as foreign diversified bond funds as opposed to corporate debt. It is one thing if some companies or industries somehow become severely damaged. Markets, companies, industries and sectors can react quicker, bounce back from adversity faster and are more adaptable and efficient in this global economy …… Groups of states and countries …. not so much. Most countries and economies realize this, although their may not advertise the idea. The US domestic as well as the international economic system would not allow that to happen on a large scale …. it would have too many ripple effects and too many unforeseen consequences. These unforeseen consequences are the scary stuff that keeps policy advisors awake at night and occasionally awakened  at 3 AM in a cold sweat nightmare.  On the other hand, creative destruction for businesses and industries is a regular is a commonly accepted systemic risk and aspect of the global business today.

We’ll see what happens.

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About Neven's Blog

My blog focuses on FINANCIAL MARKET ANALYSIS & INSIGHT from a macro as well as a micro - level point of view. The information is straight forward, honest, simplifies complex matters, questions some oversimplified matters, all while being as easy as possible for readers to understand. I primarily focus on capital and currency markets by combining insights, analysis & ideas from the fields of finance, economics and geopolitics.

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