Looking for higher yields? This week, we have targeted short 45 month Republic of Cyprus Government Bonds (denominated in Euros) and expect to achieve yields of about 14%. In spite of the island's moves to reduce its deficit and improve its finances, the country was caught up in Standard & Poor's downgrade last month of nine Eurozone countries. While the S&P ratings change moved it from investment grade to BB+, Fitch's reassessment left the rating one notch above junk status at BBB-. Knowing that rating agencies don't always "get it right," we decided to take a closer look at the economy of Cyprus and determine for ourselves whether the very high yields indicated by these heavily discounted notes would meet our own stringent criteria for "an intelligent risk," where the potential return far outweighs its discernible risk. As a result of this effort, as explained in more detail below, we see these short term Republic of Cyprus Bonds, denominated in Euros, as a very savvy opportunity to gain a well compensated exposure to both the Euro, and to the economy of Cyprus, and gladly add them to our Foreign and World Fixed Income holdings.
Wealth Preservation and US Dollar Concerns
Global equity and commodity markets appear to started the year on a positive note, yet wealth preservation and the returning weakness of the dollar remain a top priority for many people. Property prices that remain depressed, ultra-low interest rates that are set to be in place for several more years, proposals that are sowing seeds for significantly increased taxes, and a Fed that appears to be hell-bent on its multifarious control and money printing efforts to backstop numerous world economies, all continue to paint an unsightly visage of broad and rampant wealth destruction for high (and perhaps even low) net worth individuals.
Given the sad state of the current European debt crisis and economic forecast, the obvious disdain and broad negativity that many popular financial pundits have towards the outlook and uncertain future of euro, and the Fed's stated proclivity to support the European financial system and the Euro with its US dollar creative ability, we think the merits of trading a few or our own low or no yield Federal Reserve Notes for a few European Central Bank Notes (potentially netting over 14% annually while loaned to the Republic of Cyprus for 3 ¾ years) would go a long ways towards easing the pain or disappointment some might feel in not being able to magically (or legally) produce or grow their own virtual money.
Flooding the banking system with cheap (fiat) money is, of course, the central bank's traditional "fix" to any looming credit crunch. If the ECB can't or doesn't provide enough liquidity to the European financial system with cheap euros, there's always the Fed to turn to. Therefore, the financial system itself is poised to survive, and thereby the global economy survives. If or as any one bank (private, public, or national) or group of banks fail, the failure can and will be contained by larger banks or groups of banks, and the financial system and its fiat currencies, in spite of relentless devaluations, live on.
Here at Durig Capital, we have undertaken the effort to protect our client's assets against the persistent erosion of wealth resulting from inflation rates that remain significantly higher than the extremely low, but "safe," yields currently available with banksters and in US treasuries. By scouring the globe in search of sound investments, in the strongest global economies, we strive to offer the best possible high yield instruments that we think offers both a high income stream and the possibility of positively accruing money in spite of broad economic uncertainties, and it is why we have chosen this relatively short term Republic of Cyprus Government Bond, denominated in euros, as This Week's Best Bond.
Economic Background of Cyprus
The area of the Republic of Cyprus under government control has a free market economy dominated by the service sector, which accounts for nearly four-fifths of GDP. Tourism, financial services, and real estate are the most important sectors. Erratic growth rates over the past decade reflect the economy's reliance on tourism, the profitability of which often fluctuates with political instability in the region and economic conditions in Western Europe. Nevertheless, the economy in the area under government control has grown at a rate well above the EU average since 2000. Cyprus joined the European Exchange Rate Mechanism (ERM2) in May 2005 and adopted the euro as its national currency on 1 January 2008. An aggressive austerity program in the preceding years, aimed at paving the way for the euro, helped turn a fiscal deficit (6.3% in 2003) into a surplus of 1.2% in 2008, and reduced inflation to 4.7%. This prosperity came under pressure in 2009, as construction and tourism slowed in the face of reduced foreign demand triggered by the ongoing global financial crisis.