If falling interest rates have you scrambling for higher returns, consider parking some of your money north of the border--in Canada. Yields on Canadian government bonds of five years and longer are around 9.5%, about a point and a half higher than comparable U. S. securities. And the spread widens spectacularly at the short end. Three-month Treasury bills are paying just over 9% in Canada--more than three points above the U. S. T-bill rate.
U. S. investors made a lot of money in foreign bonds over the past year. But recently, the currencies of most countries, including Japan and Germany, have been falling against the U. S. dollar. "We've eliminated most of our foreign bond positions because of the currency risk," says economist Henry Kaufman, who serves as asset allocator for the National Global Allocation Fund, a global mutual fund based in Greenwich, Conn. But in Canada, where the dollar has remained stable against U. S. currency, the bond market still presents "a reasonable opportunity," he says.
That's especially true if Canadian rates continue to fall, as Kaufman and others predict. The resulting price appreciation could produce a total return of 11% to 13% over the coming year, says Kaufman.
Investment experts advise sticking to AAA-rated, highly liquid government bonds, called Canadas, in maturities of up to 10 years. You can pick up an additional half-point or so--without sacrificing too much liquidity or safety--by venturing into AAA and AA bonds issued by the provinces of Alberta and Ontario and the utilities Ontario Hydro and Hydro-Quebec. Zero coupons, called strips, are another easy way to get yields that are a half-point higher. You can buy any of these products through most U. S. retail brokerage houses.
With their three-plus point spread, Canadian T-bills are the most attractive interest-rate play. Security Pacific National Bank is one U. S. seller that has noticed growing interest in them. But you better have deep pockets: Most banks and brokerages require a $50,000 minimum purchase. (Security's minimum is $100,000.)
LONG-TERM PLAY. Before plunging in, weigh the risks of a drop in the Canadian dollar. Given the Bank of Canada's stern anti-inflation policy, no one expects a free-fall. But analysts say it might slip 2~ or 3~ from its current 86~-to-87~ range as interest rates dip. That could wipe out any advantage if you hold on for only a year.
Most individual investors probably won't find it economical to buy currency options to hedge their risk. But with higher yields in Canada, you can offset or reduce currency losses by holding on to the bonds for a while. Add it up, and chances are you'll do better in the market next door.
HIGHER YIELDS UP NORTH Treasury security Canada U.S. 3-MONTH BILL 9.06 % 5.63% 1-YEAR BILL 9.12 6.09 5-YEAR NOTE 9.36 7.66 10-YEAR BOND 9.55 8.05 DATA: BURNS FRY LTD.