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"Reaching for Yield"

“More money has been lost reaching for yield than at the point of a gun.” Raymond DeVoe

With interest rates remaining near half century lows as central banks of the world continue their quantitative easing/bond buying, it seems ‘reaching for yield’ wherever it can be found, is in full swing. Some of the poorest countries in the world have issued debt in 2013, with remarkable success. Honduras, Paraguay and Rwanda, with collective GDP of approximately $49 billion – slightly less than the annual revenue of Intel Corporation (INTC) – have sold ten year notes with yields ranging from 4.625% to 7.5% in the last 5 months, according to Reuters. Paraguay, a landlocked South American country with no record of repaying foreign investors its debt and an inflation rate triple that of the United States, auctioned $500 million of junk rated sovereign bonds in January at an interest rate of 4.625%. The issue had demand 12 times the amount for sale. Rwanda, the African nation only now starting to exit decades of ethnic tension, issued its first international debt sale in late April. The euro-denominated bonds were priced to yield 6.625%, or just over a half of a percent higher than the average yield of comparable length U.S. high yield paper. The $400 million offering had $3.5 billion worth of orders.

Our investment focus is not international bond investing, but a question can be fairly raised – ‘are investors getting compensated at those interest rates for the associated risks?’ We might argue the answer is no. Whether a bond investor or stock investor, looking for coupon payments or dividends, it is paramount to look beyond the yield ‘temptation’. Rather, a focus on the quality of the issuer producing the income and a keen discernment of the long term durability of that income is of chief importance.


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