Everyone knows the U.S. government faces a budget crisis. Everyone, it seems, except the bond market. Investors are still willing to lend to Uncle Sam for 2 to 3 percent interest, even for 30 years. Money continues to pour into bond funds.
I'm sorry to be a skeptic, but I think investors are making a mistake. These bonds may turn out okay, but they involve big risks -- not of default, but of currency debasement and inflation, which destroy a bond's value.
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So, should we all be considering buying foreign government bonds? If so, which ones are the best bets? And how can you go about getting them?
Many foreign "sovereigns" seem to offer a much more compelling trade-off between risk and return. Start with the safe ones. According to the International Monetary Fund, the industrialized-world governments with the strongest finances include Denmark, Norway, Sweden, New Zealand and Australia.
Norway is in a league of its own. The country has invested its North Sea oil windfall sensibly: While we have a national debt, King Harald V is sitting on net assets. His government's assets exceed its liabilities by about $800 billion, or 170 percent of GDP. I'd be happy to lend this man money.
People in finance still call the interest rate on Treasury bonds the risk-free rate, but for my money, that term ought to apply to King Harald's bonds. And yet 10-year Norwegian bonds recently yielded about 2.5 percent, compared with around 2 percent for U.S. Treasurys -- showing that investors have more faith in Uncle Sam than in the Norse.
The other strong nations are also sit! ting far prettier than the U.S. Sweden has net assets equal to one-fifth of its economy. Denmark, Australia and New Zealand have net debts, but each is less than 12 percent of GDP. The figure for the U.S. is 80 percent and rising.
Dan Fuss, the bond guru at Loomis Sayles, is a fan of all these countries. Your main risk is exchange rates: If the dollar rises against other currencies, it will eat into your returns. There are country-specific risks, too. Australia and New Zealand have inflation and are exposed to the commodities boom, for good or ill. So is oil-rich Norway. Fuss notes New Zealand has geological risks as well: It contains two of the world's supervolcanoes.
At the other end of the spectrum is Ireland. The fallen Celtic Tiger is trying to fight its way out of depression and austerity. There is a risk of default and a "haircut" on the bonds. But the 30-year bonds yield 9 percent. You could take a serious buzz cut on those, watching their yields plunge, and still beat someone who owned Treasurys.
Mutual funds aren't a great avenue for owning these bonds; funds tend to spread investors out among bonds from a bunch of other nations, including Japan, whose bonds pay squat. The good news is that some brokers can help you buy these bonds directly; though you'll likely have to get on the phone to make it happen. You don't need to be a high roller, either. E-Trade, for example, can usually trade in lots of 25 bonds for developed countries. That typically works out to be around $25,000. And they can deal in Norwegian bonds for around $5,000 -- not bad for a piece of Harald's kingdom.
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