Shopping for bond investments in April of 2011 is similar to eating at a buffet. Every time they lift the cover off the food you see a variety of delicious choices.
Then you peer down on your plate that’s already full of delicious choices and you start to wonder how you can pile on more variety.
This week we would like to take the opportunity to discuss and explore the differences and similarities in international sovereign debt.
Apparently it’s a common misconception to believe that there is only one internationally accepted standard of either raising money or rating debt.
In fact this discussion might demystify the role of the rating agencies and their shady politicized image.
The rating agencies are not comparing apples to apples around the world.
When the likes of Moody’s, Standard & Poor’s, and Fitch rate a certain type or class of bond, the average investor might believe that they can compare bonds from different parts of the globe, based on that rating.
We at The KIN Consortium are about to clarify the details of that facade.
First let’s start with the features of the sovereign debt that are not exactly the same:
American bonds can be categorized as long term, medium term, and short-term sovereign debt.
They are commonly referred to as treasury bonds, treasury notes, and treasury bills at federal level. They are, however, referred to as municipal bonds at state level.
The key to these bonds is that they can be bought and traded by anyone around the planet, which creates an ongoing market for discussion about constant fluctuation of bond values.
There has been a great deal of discussion about an imminent default of all these types of bonds for both counties and the sovereign debts.
The good news is that the US federal government recently raised its own credit limit allowing the frivolous spending to continue a little while longer.
The current laws state that municipal bonds can default on a city and county level, yet general obligation state bonds and treasury bonds cannot declare bankruptcy.
The current federal budget fiasco is viewed as an event that has occurred in the past, yet it is usually rectified with a combination of revolving credit and certain austerity measures.
For example, in the Bill Clinton era, there were federal defaults that led to a focused drive to raise taxes and balance the federal budget.
The Japanese market is totally different to that of the US because there is no secondary market for federal Japanese bonds.
They tend to be financed by the Japanese for the Japanese.
The yields are kept low as the demand for government debt is constantly met by the government.
It is a totally different model than that of the US because there is no secondary market for bonds.
Euro Bonds are a hybrid of the US treasury bonds and municipal bonds.
In fact they are totally confusing to secondary markets of investors because each country is paying different yields for each respective country while denominated in the same currency.
For example, the 10-year Greek euro bond is currently yielding 12.65 percent, the Irish 10 percent Euro currency bond, the French 3.77 percent and the German 3.49 percent euro bond.
From a foreign investor perspective, if the client needs Euros in 10 years he is looking at several different prices for the same currency.
They are literally getting paid different prices for the same product.
This predicament has led to various financial market pundits calling for the break up of the Euro currency.
The individual countries, within the euro zone, are only concerned over their own debts, as if they were individual states managing municipal bonds. Where are the central bank bonds that would serve as treasury bonds in comparison to the US model?
The current ECB model is an unsustainable design and it should demand the immediate attention of the international investment community.
Islamic bonds are collateralized debts that are the ideal choice of investors seeking creditworthy investments.
The rationale is that the amount borrowed will not exceed the value of the collateral.
It seems that the Islamic model is the only fiscally responsible model out of the four that we have reviewed in this article.
From the perspective of credit agencies, it must seem clear that American, European, and Japanese models are all politicized markets with insatiable appetites for racking up debts.
Their debts are backed by nothing more than promises and an unrelenting demand for revolving credit.
Then they each brag and boast about having extraordinary economies that lead the world in terms of innovation and industrialization. We simply say that we too can burn a blazing blue flame of an economy too if we had an unlimited amount of money.
It’s this fundamental inequity in financial markets that has brought about the worst drought of liquidity in terms of volume of trade in US financial markets.
The media constantly describes the lack of participants in the Japanese model as a lack of confidence in that economy. Furthermore, in recent meetings at the Bretton Woods conference, they discussed the lack of participants in US markets and the reliance on leveraged computerized high frequency traders as a lack of confidence in that economy.
Let’s just say that if there is no real market demand for your products, then please do not try to supplant real investors with artificial simulations.
Educated people may see this artificial demand simulation as stealing investor dollars from creditworthy investments.
— Khalid I Natto ([email protected]) is chairman & CEO at The KIN Consortium.