How to earn 12.28% in a 4.5% World
If you're new here, you may want to subscribe to my RSS feed so you don't miss anything. Thanks for visiting!
It has been a while since I’ve provided some juicy financial advice so here goes. Even the most prudent individual that keeps his or her money working at all times will find some periods where they have some funds that they just need to park. More often then not we end up parking our money in the bank in a checking account or perhaps a short-term CD. Free parking is only in Monopoly. If you are parking your funds in a bank checking account odds are you are eeking out a mere 1-2% at best. You are not even keeping up with inflation. If you park your funds in a 3-6 month CD, most likely you are earning no more than 4.5% (U.S. average). So what are you to do if you wish to not just keep up with inflation, but to beat it? After all our goal should be to increase our spending power not maintain it.
The answer is Iceland Bonds. I know what you’re thinking. This guy Dax is crazy. I don’t have time or the contacts or knowhow to invest in Iceland Bonds. Well you don’t need to. No, Dax is not going to take your money and invest it for you. Far from it. I will recommend to you the same thing I did 3 months ago. Buy an Iceland currency-denominated CD from Everbank. You will earn at present exchange rates 12.28% APY. They sell many foreign-currency denominated CD’s, but the one you want to get is the Icelandic Krona.
Icelandic Krona to U.S. Dollar historic exchange rate. The Icelandic Krona is appreciating.
I’ve done thorough research and there are several reasons to buy the Iceland CD from Everbank:
- Iceland currency is actually appreciating against the dollar. This not only reduces your exchange rate risk, but you will probably add another 1/2 to 1% to your return and make up to 13.28% as I did on my CD.
- The short-term is also a plus. Having your money tied up for such a short-term enables you to plan out your expenditures while not locking in your funds with longer term financial instruments to gain higher rates.
- Iceland is not a 3rd world country. It is one of the least corrupt nations according to the CIA factbook and is a stable country. The currency has been extremely stable overall compared to other nations. In fact if it ever joins the European Union their currency appreciation should accelerate considerably.
- Iceland has a stable economy, but they are paranoid about inflation. To keep it in check, they pay high rates on their government bonds. These are government bond-backed CD’s not municipal or corporate bonds that are backing these CD’s.
- The bank is a stable, heavily regulated U.S. bank. I’ve banked with Everbank from around 2001-2003 and again in 2007. The only reason I left them the first time is to chase yield. Service and range of financial instruments is superb. You can even open a Metals trading account. I will blog more about that in an upcoming entry.
- The most important reason: Dax Desai purchased it. My CD is about to mature and I will be adding more funds to it. My money is where my blog is.
So there you have it. Make 12.28% (or more) with Dax Desai and Everbank.
- Why I buy In The Money (ITM) options - 07/01/08
- Trader Update: The Breakout Trifecta - 06/11/08
- Breakout Trifecta: POT, V, AAPL - 06/05/08
- POT - Time to short? - 04/11/08
- The Economy, the Dollar, and you. - 01/27/08
Hmm… Can’t say that I ever thought about Icelandic bonds… Who has?
I’ll definitely look into this, thanks for the advice!
Dax,
Very interesting, but some questions,
Iceland has a stable economy, but they are paranoid about inflation. To keep it in check, they pay high rates on their government bonds. These are government bond-backed CD’s not municipal or corporate bonds that are backing these CD’s.
1. I may well be dense, but what is the mechanism by which paying high rates on government bonds tends to keep inflation in check? ( I suppose that the high rates can siphon away business investment and depress the economy and its demand for labor and other production factors, but this seems strange).
2. Why would Iceland pay high rates on its government bonds as opposed to a competitive market rate determined by supply and demand?
3. Assuming that the CDs are issued by Everbank, the government bonds that ‘back’ them may well have lower nominal rates of return than the CDs and Everbank may be speculating that a continuation of exchange rate trends will allow it to pay the higher CD rates without taking a business loss itself. Is anything known to contradict this?
4. What are the additional tax considerations, payable to Iceland or the US, if any, for a US investor.
Thanks, Don
You’re not dense. We’d have to do some bouyancy tests or something to say you were. :op
These are good pointed questions.
1. You are correct in that raising interest rates causes less borrowing to invest in the economy. This in turn slows down business growth (which is assumed to be overheated). This is the very mechanism that the U.S. government uses to control inflation here as well albeit our rate movements are in 1/4 percent increments.
2. The higher the rates the more money you suck up out of the system. Think if you had the option of borrowing from the bank at 6% so that you can earn 8% in some investment and government bonds were at say 6.5%, you’d still be better off borrowing to get the .5 % return. In contrast if you have a ridiculously high government bond paying more than you can make from your borrowing/investing, why would you invest when you can just buy a bond?
3. I asked. The buyer is assuming currency risk, not Everbank. They are not speculating on the exchange rate at all. In fact the underlying bond is more like 13.5%, but Everbank is paying 12.28% to account for their purchase/administration costs.
4. For the U.S. investor, you would report it as interest income on your tax return much the same as you would report interest income from your bank. This is by no means a way to avoid taxes.
These were 4 great questions Don. If you have any topic of interest, please feel free to comment or email me directly.
Dax,
Thanks.
Do you have an address for future Icelandic Krona vs dollar exchange rates and graphs and historical graphs over longer time periods?
Thanks, Don
fxstreet.com is a great site for forex charts/history.
Dax,
Dense here again. I don’t seem to be able to find any reference to Iceland at all on the site.
Thanks, Don
Dax
Is this the so called carry trade?
Could you explain more why Island krona? Other countries pay even more…
Thanks.
No this is not the Yen Carry Trade.
Here’s an example of a “yen carry trade”:
A Trader borrows 1,000 yen from a Japanese bank and converts the funds into U.S. dollars and buys a bond for the equivalent amount. Assume the bond pays 4.5% and the Japanese interest rate is 0%. The trader stands to makes a profit of 4.5% (4.5%-0%). Assuming the exchange rate stays stable the trader makes 4.5%. If the exchange rates move in the wrong direction he will lose money.
The Iceland CD is a U.S. CD that buys Iceland bonds. There is no borrowing involved. It is simply an easier way for an American to buy these bonds through a bank without the hassle.
Which other countries do you know of that pay higher rates that are stable countries and not 3rd world? I don’t invest where there are wars or political instability.
I have a quick question too…
I read up on the Icelandic krona and I saw that there was inflation of 6+% in 2006 and it should be higher in 2007. If you were to convert dollars into krona, earn 12.28%, and then convert it back, you would NOT be affected by the decrease in pruchasing power of the krona, right? Or would the currency depreciate to reflect this fall in pruchasing power, resulting is a real return of 12.28% - 6% (inflation)?
This is really interesting, but I’m always suspicious of a free lunch. Have you been doing this for sometime and have you realized the 12.28% return?
With their high inflation, they will have to keep their interest rates high to combat it. What this means is more money should be flowing into the country such as my deposits. Their currency should hold against the dollar. The dollar is by no means a strong currency right now as we all know. It is hitting record lows against all major currencies.
While it is true if you were living in Iceland the real return = Nominal Rate - inflation = 6.28%, if you are living in a low inflation nation like the U.S. your rate is much higher. You will get the same nominal rate, just subtract your nation’s inflation rate to derive your real rate. Right now the U.S. inflation rate is 2.79% so your real rate is 12.28-2.79=9.49%.
U.S. Inflation statistics gathered from inflationdata.com.
I´m an Icelander and in my bank I buy in a money market fund which has given 15,3% (per year) for the last 6 months. See here in Icelandic (Fund no. 9): http://www.glitnir.is/Markadir/Sjodir/
And here in English: http://www.glitnir.is/English/Personal/Funds/Bonds/Money/
The annual inflation rate is 3,5% now for the last year it was higher or up to 8-9%, because of prices of real estates going up and the unexpected weakness of the crown (kronur - ISK) from March to June 2006. According to the inflation rate now: 15,3%-3,5% equals 11,8% real rate per year. The risk would be currency risk as the crown is really strong. Estimates says it will fall in the 3Q of next year. Danske Bank (Danish Bank) says it will fall sooner, even for the next months: http://mediaserver.fxstreet.com/Reports/ec9a150d-8773-45c5-988d-d8a08a4fb198/57bda287-0241-466d-80ea-e62a6522a3d5.pdf But this bank is constantly preaching he fall of the Icelandic economy as a revenge act as Icelandic investors have been buying everything in Denmark.
As for the Icelandic stock market I encourage you to look at the data of the Icelandic banks, they have grown 100% the last year, showing large profits and will continue to grow.
Landsbanki.is: http://www.landsbanki.is/english/
Glitnir: http://www.glitnir.is/English/
Kaupthing: http://www.kaupthing.is/?PageID=3433
If I were to invest in an Iceland CD, I would ncessarily be converting US $ into Iceland Krona. Is there a way to buy US Dollar Futures with Iceland Krona to hedge against loss if the Krona goes the wrong way and loses value vs. the US Dollar.
Please advise
Dax, do you still have money in this?
do you think the Kroner will continue to appreciate against the depreciating US dollar?
Would it be a little risky to invest in the Krona CD now that the dollar has sold off significantly against it?
My CD has matured and at this time I would hold off on putting money in an Icelandic CD. I like to see significant upside on the exchange back to Dollars. Right now I don’t see significant upside, though there probably is a point or 2. I’ll find you guys another vehicle.
Personally I’ve had 2- 3 month terms with this instrument for a total of 6 months. It has been a profitable ride, but it is probably time to move to something else for now. The easy money on the Dollar devaluation is gone.
How does one earn 12.8% on a cd? Am very interested please get back.
Hey Dax, hows it going. You think its safe to get the icelandic cd now, and if not why would you not get it. I am 22 years old, I have been trading in the options for the past year, loosing, I want to put some money in something a little more stable. for this cd you must have 10,000 min right. or can you have less.
thanks,
Derek
Yes I do.
The sub-prime mess has far from unwound and these fears should keep the dollar depressed for some time. Also the Fed will most likely have to cut at least .25 or .50 soon. That will put further downward pressure on the dollar. Considering the Iceland CD is a 3 month instrument, I feel it is safe to open one now.
Good luck and please feel free to comment again letting me know how it goes 3 months from now if you choose to open it.
Just another addendum for Derek -
“Slowing economic growth and credit concerns likely will undermine flows into U.S. corporate bonds and equities, undermining the U.S. dollar,” said Gabriel de Kock, currency economist at Citi Markets and Banking, in a note to clients.
-From Reuters.com
Dax Desai:
You are right. I plan to save some of my money to everbank in 3 month currency cd. I think dollar will continue fall.
Dax,
I’ve been looking at Everbank’s Iceland CDs for several months now. I never took the plunge because my understanding was that the ISK is a somewhat illiquid currency and therefore exhibits short term price volatility that could easily wipe out the 12% interest gain as you convert back and forth from USD. Can you elaborate on how good a conversion rate you got (going in and out of the CD)?
I have not jumped in. I am going to park my money in money market (5.5% for 3 money) and waitting for the good exchange rate. My ideal rate for now is around $1=63. If Fed continue cut US rate and then $ sinks. I plan to stick to it for longer term (2 or 3 years).
I am worrying whether or not Everbank could bankrupt due to involving subprime. I believe they did.
Here’s a quote from Frank Trotter, big cheese at Everbank:
Many people have asked about EverBank in the context of the happenings in the markets over the past several weeks. I would like to take this opportunity to make a couple of clear statements for customers and market watchers:
EverBank is a diversified financial services company engaged in retail and commercial banking, investments, and the production and servicing of mortgages. We have a balanced revenue stream that does not depend either solely or substantially on any one line of business. EverBank is in a strong capital and liquidity position. Results through second quarter this year include an ROE of 16%, and a capital raise in June that enhanced our already strongly capitalized position. EverBank does not originate or own sub-prime mortgages. EverBank is rated “Green Three Star” by Veribanc, and “Superior” by IDC. It has been and is the practice of EverBank not to seek additional return by taking on substantial credit risk; we have a conservative portfolio and are proud of the performance history of our high quality assets.
I have an IRA with Fidelity, a conversion from my previous 403b. Is it possible to buy this Iceland CDs into my IRA? How would that work?
Thanks, Mauro
I’m glad u made money on this so far.
I would call this a HIGH RISK investment though.
so I would suggest people to stay away from it, until they are very familiarized with all the risks involved. Once they know whats really going on, than they can decide on their own, cause this is High Risk..
The Islandic Krona, in a 3-month period, Average True Range is prolly somewhere along 12% versus the US. Dollar…
Island will give u 14% thats apr.. thats over a 12 month period.. so lets cut that down to 3.4% or so in 3 months.
That means that the actual Islandic Krona versus US dollar movement makes up 75% or more on whether you make money or lose money.. yes, lose, you could easily lose a good chunk of money.
So for the most part this is just betting the KRONA outperforms the USD.. with some hedge coming from the interest you collect.. but still..
very risky.. EVERBANK.. kind of pushes this out as a safe bet CD, but there is nothing safe bet about it. Iceland economy is hurting right now, and its a very small island, wild things could happen, even hyperinflation, that depreciates their currency very fast, and wipes out a good chunk of your investment when you convert back to USD
I sent money to everbank last year and waited the good rate for better exchange rate for ISK (iceland krona). The money market rate I was parking was 5.5%. My money had been everybank for 5 days last year and they only paid me 1 day interest for last year. I called everbank and they didn’t give me any reasonable answer. Thank god I din’t jump in any curreny CD there and I am going to close my account right away. I have to advise everyone to be very carefully to deal with this bank. There is a lot of hidden issues.
With the dollar plummeting against European currencies, why would the Icelandic K. go from 12% APY to under 9% now? Thanks
Charles - While it is true the dollar is plummeting, you must consider that the underlying economy of the currency in question also plays a part with interest rates. Iceland propped up their interest rate due to inflation fears.
Inflation is dropping and their economy is cooling. Money is starting to flow out of the country or at least not flowing in as fast. Due to this their currency has dropped against the dollar. Anticipating further corrosion perhaps is why Everbank is giving only 9%.
That Icelandic CD is now earning 5% with no change in the Central Bank rate and a 30% depreciation in the currency from its lows.
I am bleeding badly on this one.
Dax:
Thanks for your very insightful comments on the Iceland CD from Everbank.
I was routinely getting 12%+. Now it has dropped to 5%.
How can you explain this when the Iceland govt has increased interest rates to 15%. In other words, Everbank is paying 10% less on the CD, what you could probably get if you opened a local Iceland bank account (if that were possible).
Is this the time to bail out of Iceland CD or do you recommend that we hold for a few months hoping currency appreciation against the dollar?
Many thanks again.
well the ISK has tanked 20% since January …
lowest against the dollar since 2001
my Everbank ISK CD matures April 15
gotten a little better since Iceland raised interest rates to 15%
but I’ve still lost about 15 % of my principle … due to the conversion rate
ISK has appreciated against the dollar 4 out of the last seven years and only lost ground twice in the Q2
should I rollover the CD and hope in regain my principle in Q2 ?
does anyone know what is going on there? does anyone really know anything
except the Icelandic banks? Everbank certainly does not give out any meaningful information except to note that the ISK is very volatile..duh
obviously alot of accounts were cashed out in Q1.
I read where Bear Stears had set this up ahead of time and Icelandic banks were going to sue them ?
Moody’s also downgraded the ratings of Icelandic banks even though all objective evidence says they are extremely solvent and stable with no exposure to the sub-prime mess in the US…
sounds like the crooks on Wall Street are at it again ………..
any current information would be most appreciated (no pun intended)
-RW
Anthemra - I feel there is something fishy with the Krona value right now. I would stay out of it and not roll into it again. Since you are using Everbank I assume you have at least $10K in it. Consider rolling into financials via the XLF. I think the financials are ready for a good run. In my opinion, the least resistance for financials is up. Consider XLF for a 10-15% gain over 90 days (similar to the Iceland Krona play, but with more control over when you exit and with how much profit).
How about that Potash! I hope you read my post on POT back in Feb. I recommended it when it was $149 and it is trading up over $176 now.
Thanks God. I didn’t jump in this currency CD. I put my money in money market. I withdrawed all the money from everbank. I knew everbank playing some tricks.
There are some very stable stocks paying more than 12%
divident. I purchased some. such as ERF, PVX, PGH, PWE.
There is a broker with 10 time free trading per month. It works very fine. I am enjoying do some trading.
I’ve noticed the ISK is rallying against the dollar. It has gone up in Q2 relative to the USD in four out of the last seven years and stayed the same one year.
Anthemra - I think the easy money is gone now for ISK. If you see a rally in ISK you should probably try to cash out into dollars. Though the dollar is weak I suspect there isn’t much more on the downside. I think there is some space, but not much left.
I think the AUD, CHF & YEN are better bets than ISK right now.