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Published on September 13, 2007

The havoc wreaked by cheap credit has made sovereign debts the most sensible alternative, Robert Kessler, founder and CEO of Denver, Colorado-based Kessler Cos, said yesterday.

With US household debt at an unprecedented high - hovering at about 25 per cent of disposable income - and the Federal Reserve likely to cut interest rates successively in the next two or three years - sovereign debts, particularly two-year US treasury notes, can yield as much as 33.8 per cent cumulative or 15.7 per cent annualised, he said.

Yet traditionally, the treasury notes have a somewhat-conservative reputation - a traditional investment where investors park their money when the stock markets are not performing, said Sanit Sirikolkarn at Goldman Sachs.

But by trading these treasury notes, investors can turn crisis into an opportunity, he said. Yet the two-year notes have been among the worst performers.

But Kessler, whose company deals exclusively in bond investment, said that by borrowing to buy maybe four of the five treasury notes, investors, having taken in the cost of borrowing, could offset the initial negative carry trade, betting on rate cuts.

Kessler is optimistic the Federal Reserve's rate cuts will inversely benefit his treasury-note yields.

He says his company netted a 63.4-per-cent cumulative or 17.8-per-cent annualised return on the back of the dot.com boom.

The sub-prime collateralised debt obligations, or what Kessler refers to as "crazy papers", have triggered a gross rise in prices, indicative of the peak of the business cycle and the ensuing collapse.

Bad news for stocks lead to interest rate cuts, which is good news for treasury-bond holders.

Sovereign debts offer a combination of liquidity, quantifiable risk, a lack of credit risk and, more importantly, transparency, Kessler said.

Individual investors cannot buy US treasury bills directly, he said.

But Krung Thai Asset Management's Teerapan Jittalarn hinted of the possibility of such products being offered to Thai investors.

In 1994, Kessler, then a principal with Citadel Funding Corp, was fined US$25,000 by the National Association of Securities Dealers - the self-regulatory organisation of the Nasdaq Stock Exchange - for allegedly failing to account accurately for certain highly leveraged lending and borrowing transactions that it engaged in to finance operations valued at $900 million.

Ki Nan Tsui

The Nation