The current global credit crisis has created distortions that make many investments look bad. These same distortions have made leveraged multicurrency investments better.

Governments and central banks have lowered interest rates in numerous countries, including the U.S. This means that four currencies can be borrowed at Jyske Bank with low lending rates.

Those currencies are the U.S. and Singapore dollar, the Swiss franc, and the Japanese yen.

The rates, depending on the amount borrowed, are:

U.S. dollar: 4.125% to 4.875%
Swiss franc: 4.25% to 5%
Japanese yen: 2.5% to 3.25%
Singapore dollar: 3% to 3.75%

The multicurrency distortion is created because deposit rates on other currencies have risen.

Interesting deposit rates are on Turkish lira, Australian and New Zealand dollars, Icelandic króna, Hungarian forint, and South African rand.

These rates are:

Turkey: 14%
Australia: 6.875%
New Zealand: 8%
Iceland: 5.25%
Hungary: 7%
South Africa:10.25%

If one wished to leverage investments with the least risk (other than Forex), one could simply borrow the four currencies above and invest in deposit accounts in the six high-rate currencies.

Take, for example, an investment of $100,000 leveraged with a $200,000 loan of $50,000 borrowed in each of the four low-rate currencies. This raises $300,000 to invest.

The average loan rate (at the highest rate) is 4.21%…and $50,000 is invested in each of the six high-interest-rate currencies.

The average interest rate earned is 8.56%. The annual interest earned is $25,687.

The loan cost is $8,420. The income after loan payments is $17,267 or 17.26% on the $100,000 invested.

This is not bad. Such a portfolio is well diversified from a currency and geographic perspective. There is still a currency risk and investors should never leverage more than they can afford to lose.

Every investment has risk. The key to good multicurrency investing is to be sure that the premium you are paid for taking the risk is good.

In my opinion, 17.26% is more than a fair premium, but we can do even better with bonds, as I’ve been discussing in my multicurrency education service.

Gary Scott
For International Living

Source: Borrow Low, Deposit High

Right now, the lowering strategy is winning, and the lower U.S. dollar interest rate means that investors are likely to park their investments and savings in other currencies that pay higher returns. This reduces demand for dollars and means the dollar may fall even more against other currencies.

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This creates the perfect Multi Currency Sandwich position…an investment strategy that borrows a potentially weak currency at a low interest rate and invests the loan in a potentially strong currency at a higher rate of return.

The troubles of the U.S. dollar are so serious right now that one opportunity–unimaginable in the 1980s and 90s–is to borrow U.S. dollars to invest in Russian rubles!

Russian political stability looks strong with the new president Dmitry Medvedev assuming office. But Russia is facing many economic challenges, especially inflation. One way the Russian central bank will likely solve this is a revaluation of the ruble. This creates the potential for significant gain due to the interest rate differential between the ruble and the dollar…in other words, a “positive carry.”

My banker at Jyske Bank just offered a Bank of Moscow bond issue that matures in 2009. The bond has a coupon of 7.25%, but sells at a slight discount so the yield is 7.35% per annum. Because of falling interest rates in the U.S., Jyske Bank will lend you dollars for 4.5%. This means you make 2.85% positive carry by using Bank of Moscow bonds to borrow dollars.

For example, say that you invest $100,000 in the Bank of Moscow bond mentioned above. You earn $7,350 a year interest. If you use that $100,000 bond as collateral and borrow $200,000, your cost for the loan at 4.5% per annum is $9,000 a year.

You use the borrowed $200,000 to buy Bank of Moscow bonds, increasing your yearly interest income to $14,700, or $5,700 more than the interest cost of your dollar loan.

Now your total return on the $100,000 you originally invested is $13,050. Your Multi Currency sandwich has nearly doubled the return on your investment. Plus, since your Bank of Moscow bond is actually bought with and denominated in rubles, you stand to gain on any appreciation of the Russian currency as well. If the ruble appreciates 10%, your Forex gain would be $30,000…a nice bonus.

Fundamental fiscal conditions in the U.S. suggest that the greenback will remain weak. Economic conditions point toward continued low dollar interest rates. However, there is always a risk of reversal of rising interest rates and a stronger dollar versus the currency you invest in. I suggest using this technique only for mid- to long-range investment timeframes…five or more years. And never leverage more than you can afford to lose.

Gary Scott
For International Living

Editor’s Note: Gary has been dealing with bonds and currencies for almost 40 years. He never worries about the value of the dollar, or the recession as there are always currencies…and companies…that can weather the storm…even prosper…over the long term. To see how you can do this, too, read this special report.

Source: Safe Bonds with 7.35% Yield

Brazil’s currency, the real, makes sense for multi currency diversification because Latin America is the fastest growing emerging region.

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You can borrow U.S. dollars to make multi currency investments from Jyske Bank at rates a bit above and below 4.5% depending on the amount borrowed.

You can also buy Brazilian bonds that yield around 11%.

For example, earlier this month Jyske Bank offered these two Brazilian government bonds:

* Brazil 12.5% maturing 2016 yield 10.9%

* Brazil 12.5% maturing 2022 yield 11.0%

If you invest $100,000 (the minimum for a leveraged account) and borrow $100,000 at 4.5%, investing both the loan and original investment in Brazil, with $100,000 in each of these bonds…your average return after fees will be about 10%. That works out to $20,000 a year income on $100,000 invested…or 20% per annum.

Plus, the Brazilian currency has appreciated enormously versus the U.S. dollar. This could add an extra profit.

Yes, there is risk. The U.S. dollar/real rate could also create a loss.

For example, in the last year, the dollar has dropped versus the real until March. Now the dollar is having a mild recovery. Had you made the investment above in March, you would have experienced some downward pressure on your loan.

Plus, there is always the risk that interest rates could rise, which will reduce the value of the bonds. Brazil’s investment rating could fall. Dollar interest rates can rise. Any of these events would reduce profits and could even create a loss.

These risks are why you should never leverage to invest in currencies more than you can afford to lose.

On the other hand, compare the risk premium. The leveraged Brazilian bonds pay you 20% per annum to take this risk.

But there is risk in holding any investment. The investment that is deemed the safest in the world, U.S. Treasury bonds, has risk. Inflation can (and has for the past 40 years) chew the bond’s purchasing power to pieces.

On the same day that the Brazil bonds paid 11%, the 10-year U.S. bond paid 3.59%.

Add this up for ten years. The Brazilian bonds pay you 20% per annum–that’s 200% over ten years. The Treasury bonds pay 3.59% or 35.9% in total.

Are the Brazilian bonds that risky, we must ask?

The overall picture is not quite this simple but these numbers reflect the general idea.

There are ways to make this type of investing safer such as borrowing more than one currency and/or investing in more than one type of bond. For example, a yen and dollar loan invested in Russian, Turkish, Brazilian, Indonesian, and South African bonds spreads the risk and increases the risk premium.

Gary Scott
For International Living

Editor’s Note: Gary Scott, long-time friend of IL, has been analyzing and writing about global investments for more than 30 years. His multi-currency education service which you can buy today for a dollar teaches individuals how to create their own global, value-oriented investment portfolio that can take advantage of opportunities U.S. investors are often unaware of. Gary will explore this in more detail when he speaks at International Living’s “Ultimate Event” in Cancun, Mexico, May 28-31.