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Old 12-10-2019, 05:35 PM
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Default Investing in foreign gov debt

Anyone have experience on this directly?

I'm interested in getting the higher return and taking a gamble on the FX rate movement (so wouldn't hedge the FX exposure). A little unclear on the details though.
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Old 12-10-2019, 06:06 PM
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EM or developed?
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Old 12-11-2019, 08:40 AM
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I donít have experience with this, but would also be curious as to what markets youíre thinking of. Itíd probably also be an interesting exercise to try and decompose the total risk into credit/default risk / interest rate risk / FX risk. If youíre thinking that the FX exposure is going to be negligible (or at least a relatively small portion of the risk), and it turns out not to be, you might want to rethink the investment strategy.
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Old 12-11-2019, 11:00 AM
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EM or developed?
EM, the returns are phenomenal when you ignore the currency risk, which I'm thinking I'd be comfortable with for a diversified basket / relatively short term (2 years or less).

Most things I'm aware of are more bond funds hedging the FX back, which obviously negates most of the return benefit due to interest rate parity. I'm willing to roll the dice on interest rate parity not actually playing out due to fundamental differences of growing versus shrinking economies and using that to try to beat out the ~2% return I can get in local debt.
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Old 12-11-2019, 11:03 AM
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I donít have experience with this, but would also be curious as to what markets youíre thinking of. Itíd probably also be an interesting exercise to try and decompose the total risk into credit/default risk / interest rate risk / FX risk. If youíre thinking that the FX exposure is going to be negligible (or at least a relatively small portion of the risk), and it turns out not to be, you might want to rethink the investment strategy.
I'm thinking the FX and credit are reasonably diversifiable. Credit is stomachable for shortish term. FX is the wild card.

I'm thinking something like 100k total investment split into 5 countries, one South American (not Argentina), two south east Asian, one Arabic, one African. Haven't dug through details yet. Term of 1 or 2 years.
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Old 12-11-2019, 11:08 AM
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http://www.worldgovernmentbonds.com/

I could stomach any of:

South Africa 8.38
Indonesia 7.325
Mexico 7.092
Brazil 6.778
India 6.776
Columbia 6.074
Romania 4.69
Philippines 4.596
Peru 4.182

(those are all 10 year rates, I would want shorter rates, but I'm lazy they're indicative since yield curves are all pretty flat these days)
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Old 12-11-2019, 11:19 AM
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EM, the returns are phenomenal when you ignore the currency risk, which I'm thinking I'd be comfortable with for a diversified basket / relatively short term (2 years or less).
Lol, well obviously otherwise everyone and their mother would be piling into EMD Local. We typically advise our clients (institutions) to do a 50/50 blend between external and local EMD. Personally, I don't like to add additional risks to one type of investment. For EMD, why add the currency risk. If you want currency exposure then take explicit forex exposure.
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Old 12-11-2019, 11:32 AM
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Lol, well obviously otherwise everyone and their mother would be piling into EMD Local. We typically advise our clients (institutions) to do a 50/50 blend between external and local EMD. Personally, I don't like to add additional risks to one type of investment. For EMD, why add the currency risk. If you want currency exposure then take explicit forex exposure.
It comes by default, so, by your approach, I'd be paying to hedge the FX risk, then, paying again to take it, seems a bit unnecessary.

I don't believe interest rate parity will play out short term, it needs to be baked into the forward FX rates, but the actual FX movement is tied to a lot of factors beyond just interest rates.

I also don't believe it will play out long term, but the credit risk gets harder to accept for long term.
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Old 12-11-2019, 11:33 AM
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Oh, and, I'm not talking about throwing all my eggs in this basket, just as something I'd like to get more direct exposure to. There is large risk in holding local debt in the yield not pacing with inflation, but that's not a risk that's as transparent to people.
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Old 12-11-2019, 11:33 AM
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I'm thinking the FX and credit are reasonably diversifiable.
Why would FX be diversifiable? If I'm in one foreign currency or a million, if the dollar goes up, I have a loss.
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