Quote:
Originally Posted by Gigi3000
Do you buy CDs or Treasury equivalents in any
foreign countries? We can include mutual funds too.
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No, I don’t. There’s no free lunch.
If you want to invest that way chasing higher interest rates in other countries, you might consider that country interest rates are associated with country inflation rates. Higher inflation rate —> Higher interest rates. (If you want to read about it, look up Fisher’s equation on interest.)
Why does this matter? If you buy a foreign debt instrument in their local currency such as pesos, you are exposed to currency exchange risk — future currency depreciation against the US dollar. A country with higher inflation will likely have its currency depreciate against the dollar that shows up in exchange rates. (This does not apply if you buy a foreign bond denominated in US dollars.) For instance, if you buy a foreign one-year CD paying 10% interest, you must first convert your dollars into the foreign currency at today’s exchange rate. In one year, you have earned 10% interest from the foreign bank. If you want your money back in US dollars in one year, you must convert your foreign money using the currency exchange rate at that time. If the foreign currency depreciated 15% against the dollar, you have lost money. You earned 10% in interest and lost 15% in the currency exchange.
International investing: Inflation rates, interest rates, and currency exchange rates are linked together. In addition to exchange risk, you may be exposed to default risk.
Take a look at the government bonds paying higher interest rates at the link below. These high-interest countries generally have higher inflation rates or higher default risk or both.
10-year government bond yield by country 2023 | Statista
Moral of the story: There is no such thing as a free lunch of higher interest rates without accepting higher risk.