Foreign Interest rates
June 25, 2010 10:54 PM Subscribe
What are the best foreign interest rates, and how can I take advantage of them?
While I was talking with my mom about money matters, she asked what I thought about sending my money overseas and depositing it in Korean savings accounts, since the interest rate in Korea is higher than the interest rate in the U.S. That got me thinking: are there other countries with even better interest rates? If there are, how would I be able to take advantage of them? Is this a secure method of accumulating interest?
While I was talking with my mom about money matters, she asked what I thought about sending my money overseas and depositing it in Korean savings accounts, since the interest rate in Korea is higher than the interest rate in the U.S. That got me thinking: are there other countries with even better interest rates? If there are, how would I be able to take advantage of them? Is this a secure method of accumulating interest?
Is this a secure method of accumulating interest?
Not at all. There is a significant risk that the relevant exchange rate will change. If the exchange rate moves in the wrong direction, you could easily find yourself with less money than you started out with in the original currency. You also have to keep in mind that inflation rates will differ and that this can affect the exchange rate. There is a risk that the country your money is in will have significant bank problems (Iceland is a recent example of this). Finally, you will lose some portion of your savings in commissions to change your funds into foreign currency and then back again.
This can end very badly for you if you are unlucky. If you want a safe interest bearing account, get one in your own country. If you really want to do this, make sure you do your research and understand the risks.
posted by ssg at 11:22 PM on June 25, 2010
Not at all. There is a significant risk that the relevant exchange rate will change. If the exchange rate moves in the wrong direction, you could easily find yourself with less money than you started out with in the original currency. You also have to keep in mind that inflation rates will differ and that this can affect the exchange rate. There is a risk that the country your money is in will have significant bank problems (Iceland is a recent example of this). Finally, you will lose some portion of your savings in commissions to change your funds into foreign currency and then back again.
This can end very badly for you if you are unlucky. If you want a safe interest bearing account, get one in your own country. If you really want to do this, make sure you do your research and understand the risks.
posted by ssg at 11:22 PM on June 25, 2010
What you are describing is a carry trade. It was really popular for a while and a lot of people were making money on it, and then it made a large number of people much poorer.
This is a fairly easy Economist article on carry trades, and a more difficult one about carry trades and currency crashes.
posted by milkrate at 11:41 PM on June 25, 2010
This is a fairly easy Economist article on carry trades, and a more difficult one about carry trades and currency crashes.
posted by milkrate at 11:41 PM on June 25, 2010
What you're describing sounds like the carry trade. As others have pointed out, it offers small steady returns and huge sudden losses, like picking up nickels in front of steamrollers.
For interest's sake (ha!), there is at least one currency carry trade ETF. It would be nice to combine this with currency momentum and valuation ETFs, but I don't know if those will ever be offered.
posted by blue grama at 12:06 AM on June 26, 2010
For interest's sake (ha!), there is at least one currency carry trade ETF. It would be nice to combine this with currency momentum and valuation ETFs, but I don't know if those will ever be offered.
posted by blue grama at 12:06 AM on June 26, 2010
Guys we don't consider this the Carry Trade, as OP apparently isn't funding on the US side. As the funds are already in hand all we have to keep in mind is opportunity cost, not funding cost.
Regardless, the very well expressed points unthread re: currency and default risk apply, especially since deposit insurance isn't unified globally and, in fact, doesn't exist in many nations. Or at least at levels or in forms US investors take for granted.
More germane to OP's query, here is list of global interest rates, with Venezuela, Pakistan and Brazil currently running base rates of 18.41%, 12.50% and 10.25% respectively. Depositing funds into these countries isn't for the faint of heart nor, I'd be so bold as to suggest, for retail money at all. Some of the highest yielding nations have, in the past, instituted controls of currency outflows, or outright government confiscation of foreign owned assets.
OP should consider that most of the developed economies are sending signals that rates are going to stay low for a prolonged period. At the same time we're seeing evidence of deflationary forces not only persisting but strengthening; I write weekly market commentary for private clients and am fortunate to have a job where I can present on pretty much any financial topic that interests me. Last week I gave presentations to two different groups of investors about deflation. Deflation has been of interest to me since there are clear signals of it in the system, and deflation seems to be the last worry on everyone's mind. Which, of course, means you should be thinking about it now.
Deflation seems to be here and intensifying. How strongly do I feel about this? Well, this week I paid off my mortgage some 16 years early, even incurring a penalty to do so. That strongly.
OP should consider that lots of folks are eschewing liquidity and moving into tangible assets.
posted by Mutant at 3:59 AM on June 26, 2010 [1 favorite]
Regardless, the very well expressed points unthread re: currency and default risk apply, especially since deposit insurance isn't unified globally and, in fact, doesn't exist in many nations. Or at least at levels or in forms US investors take for granted.
More germane to OP's query, here is list of global interest rates, with Venezuela, Pakistan and Brazil currently running base rates of 18.41%, 12.50% and 10.25% respectively. Depositing funds into these countries isn't for the faint of heart nor, I'd be so bold as to suggest, for retail money at all. Some of the highest yielding nations have, in the past, instituted controls of currency outflows, or outright government confiscation of foreign owned assets.
OP should consider that most of the developed economies are sending signals that rates are going to stay low for a prolonged period. At the same time we're seeing evidence of deflationary forces not only persisting but strengthening; I write weekly market commentary for private clients and am fortunate to have a job where I can present on pretty much any financial topic that interests me. Last week I gave presentations to two different groups of investors about deflation. Deflation has been of interest to me since there are clear signals of it in the system, and deflation seems to be the last worry on everyone's mind. Which, of course, means you should be thinking about it now.
Deflation seems to be here and intensifying. How strongly do I feel about this? Well, this week I paid off my mortgage some 16 years early, even incurring a penalty to do so. That strongly.
OP should consider that lots of folks are eschewing liquidity and moving into tangible assets.
posted by Mutant at 3:59 AM on June 26, 2010 [1 favorite]
Sixthing or seventhing that this is a tremendously bad idea.
In return for the higher interest rate, you're taking on a whacking great lump of currency risk. Here's a worked example (using Bloomberg data, so it's very very rough)...
Let's say today's the first of May, 2010, and you've got $10,000 in the bank. The sun is shining, it's a lovely day; a perfect morning for a kid to play. But you've got lots of bills to pay, and they all fall due on the first of June.
You could stick your money in a term deposit at your friendly local bank, which pays 0.28% for a one-month deposit. Or you could wire your money over to your friendly local bank in Korea, which pays (let's say - I can't find this rate anywhere) 2% for the same one-month deposit. You need the extra interest, so you change your $10,000 USD for 11.17 million KRW ('cause the USDKRW rate is 1117), and you stick it in the bank.
A month later, it's the first of June, and you take your money out. You got 18,600 won interest, which is great - it's eight times more than you would've got from the American bank. Sweet! So you ask the bank teller for your ten-and-a-bit grand back, and she hands you a cheque for... nine grand.
What's happened between the first of May and the first of June is that the value of the KRW has plunged against the USD. Over the month of May this year, it went from 1117 (one dollar buys you 1117 won) to 1235 (one dollar buys you 1235 won).
(And this happens a lot - KRW's a notoriously and spectacularly volatile currency. I trade Asian emerging-market currencies for a living, and KRW's by far the most volatile of any of the currencies I touch.)
So you've picked up your little bit of extra interest - over the course of a month, it amounts to about one-sixth of one percent of the money you put in. But over the same month - over just one month! - you've lost ten percent of the money you put in on the exchange rate.
Are you really willing to put that much of your money at risk for an extra fraction of a percent?
posted by The Shiny Thing at 8:45 AM on June 26, 2010
In return for the higher interest rate, you're taking on a whacking great lump of currency risk. Here's a worked example (using Bloomberg data, so it's very very rough)...
Let's say today's the first of May, 2010, and you've got $10,000 in the bank. The sun is shining, it's a lovely day; a perfect morning for a kid to play. But you've got lots of bills to pay, and they all fall due on the first of June.
You could stick your money in a term deposit at your friendly local bank, which pays 0.28% for a one-month deposit. Or you could wire your money over to your friendly local bank in Korea, which pays (let's say - I can't find this rate anywhere) 2% for the same one-month deposit. You need the extra interest, so you change your $10,000 USD for 11.17 million KRW ('cause the USDKRW rate is 1117), and you stick it in the bank.
A month later, it's the first of June, and you take your money out. You got 18,600 won interest, which is great - it's eight times more than you would've got from the American bank. Sweet! So you ask the bank teller for your ten-and-a-bit grand back, and she hands you a cheque for... nine grand.
What's happened between the first of May and the first of June is that the value of the KRW has plunged against the USD. Over the month of May this year, it went from 1117 (one dollar buys you 1117 won) to 1235 (one dollar buys you 1235 won).
(And this happens a lot - KRW's a notoriously and spectacularly volatile currency. I trade Asian emerging-market currencies for a living, and KRW's by far the most volatile of any of the currencies I touch.)
So you've picked up your little bit of extra interest - over the course of a month, it amounts to about one-sixth of one percent of the money you put in. But over the same month - over just one month! - you've lost ten percent of the money you put in on the exchange rate.
Are you really willing to put that much of your money at risk for an extra fraction of a percent?
posted by The Shiny Thing at 8:45 AM on June 26, 2010
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You might want to ask the Dutch and Germans investors who put money into Iceland's banks.
You might also consider the risk of currency inflation. If you're on the wrong side of that equation, the interest rate becomes effectively negative. On the other hand, if you're on the right side of currency movements, you can do quite nicely.
It's a matter of risk of course. High return usually means high risk. Anything that looks like a sure bet, is really stacked against you.
posted by three blind mice at 11:12 PM on June 25, 2010