How do I make 10% annual return with Government Bonds ?

The US Govt bonds yield around 2.2% so they are not attractive for me at all. I look into Non-US Sovereign bonds in Emerging Markets. Below is the list of bonds I am holding at the time of this post.

BondsPar ValueCouponIB Margin FeeAnnual Return
Egypt Govt$200K8.5%3.09%$13,910
Costa Rica Govt$200K7.158%3.09%$11,226
Mexico Govt$200K4.6%3.09%$6,191
Summary$600K6.75% (avg)3.09% (avg)$31,327

Let me explain how to calculate the return. To buy the first Egypt bond for example assume you have just $100K but minimum trade is at $200K. IBKR lets you have a Margin Account where you can borrow money as much as your cash. In this example you can afford to buy $200K bond if you borrow $100K from IB. The borrowing cost for a year is at 3.09% at the time of this post. You can check the current rate here . So IB will charge you 3.09% of $100K you borrowed that equals to $3090. This is the cost of the loan for you. Your return from the bond is the Par Value ($200K) * Coupon (8.5%) = $17000. If you deduct the borrowing cost you have an amazing $13910 return. Also note that because the asset is based outside of US you do not pay any Witholding Tax a.k.a WTH. I will explain WTH in a later post. I pay no tax from this return therefore it is net to me. IB does not charge you for holding the bonds. I live in Dubai where there is no income tax. As a result I invested just $100K and had a return of $13910 that equals to a whopping %13.91 .

You can apply the same calculation to the rest of my bonds Costa Rica and Mexico. As a summary for all my bond investment, I put $300K cash and had a return of $31327 that equals to a whopping %10.44 exactly.

There is nothing stopping you to do the same as what I do. You may be wondering why I do not put all my money in to Egypt where I would get %13.91 return instead of %10.44? It is to diversify my portfolio and sleep well at night. Diversification minimizes the Risk you are exposed to. Imagine all your life savings are in one asset and there is a problem with the asset not paying coupon or economic crisis etc. I picked my bonds from different continents where they are not related to each other. Egypt economy is dependent on Oil and Gas where Costa Rica’s economy depends on Tourism and Agriculture. Mexico is bringing the lowest return but it is the safest asset in my portfolio. The more Risk you take more return you can get. Risk factor is a key for any investor at any size. Some of the books I read they mentioned “The Risk can be measured by your quality of sleep”. By holding an asset in your portfolio you are so nervous and worry about it’s value going down then do not hold that asset. It is not worth it!

Also note that all my bonds are in USD. I do not invest in any other currency. You will find local currency bonds with much higher yields however you carry currency risk. Another risk impacting your sleep at night so avoid it at all times.

Leave a Reply

Your email address will not be published.