The Brazilian currency, the real, got another boost from the 50 basis point (0.5%) hike in the central bank’s target interest rate on June 4, making Brazil treasury bonds an attractive component of a multi-currency investment portfolio.

Chuck Butler anticipated the rate move in The Daily Reckoning earlier this week…

The Brazilian real (BRL) continues to buck the dollar buying binge, and post nice gains versus the dollar. The Brazilian Central Bank President, Meirelles, isn’t going to go around blaming something/someone else for his inflation problem.

Instead, I look for Meirelles to hike rates at his meeting today, following up on last month’s rate hike. Inflation had picked up to 5.25% in May… And that’s not acceptable. The Brazilian President is also singing from the same song sheet as the Central Bank President regarding inflation… So, expect another rate hike today… And that should increase the fire under reals.

The currency gains from a higher interest rate must be viewed in the context of the impact this has on the price of Brazil treasury bonds, as well as the inflationary fears behind the decision.

A great read is Gary Scott’s article Why I Like Brazilian Bonds in International Living, written before the country reached investment grade status late last month…

Multi currency investments can reap rich rewards right now. Take, for example, this multi currency Brazilian investment. The recent drop in U.S. dollar interest rates means you can now borrow dollars at between 4.175% and 4.875%.

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

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.