Hedging Against a Weaker Greenback

11/15/2007 12:00 am EST

Focus: BONDS

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

Bryan Perry, editor of the 25% Cash Machine, says a new closed-end short-term international bond fund will offer investors protection against a falling dollar.

Given the plight of the greenback, it's logical to balance our holdings with more emphasis on global income plays that are leveraged to other currencies moving counter to the dollar.

Enter the newly issued Nuveen Multi-Currency Short-Term Government Income Fund (NYSE: JGT). The investment objective of this fund is to provide an attractive level of current income and total return. JGT will invest directly in short-term international, non-US government securities.

The management invests indirectly in international securities through the purchase of forward-currency contracts and other derivative instruments relating to such short-term international government securities. The investments of the fund will be denominated by (and otherwise provide exposure to) multiple international non-US currencies.

JGT went public in late April 2007, and as of July 1 held assets of $858 million. At a closing price of $18.17 Wednesday the fund is trading at a 9.33% discount to its net asset value (NAV), and carries a current distribution rate of 9.8% that pays out on a quarterly basis.

Being a relatively new fund in a hostile market, where closed-end funds have yet to fully recover from the summer correction, it pulled back and is just now finding a bid-even though its NAV has ticked higher since the IPO date.

Nuveen Multi-Currency Fund leverages its assets by about 30% to generate the 9.8% dividend yield. Of the $858 million under management, the fund invests 65% in short-term government bonds denominated in foreign currencies and the remaining 40% in short-term US securities as collateral for buying forward foreign-futures currency contracts. Simply put, it is taking about $400 million of the fund and leveraging it to $1.2 billon in foreign-currency contracts by keeping $400 million in highly liquid US agency securities.

As long as the Federal Reserve keeps lowering interest rates, while simultaneously pumping freshly made dollars into the money supply, the greenback is headed lower. Fed Chairman Bernanke inherited this problem, but at present it has him pigeonholed and he pretty much has to stay with this plan until the ballooning US government budget deficit is addressed.

We have a president and Congress that are spending money like drunken sailors-all of
Washington is to blame here, although Congress is the gatekeeper when it comes to regulating spending. Without serious changes in the way the current government-spending system is operating, it would appear that the decline in the dollar will only continue. [This is] well-supported by the phenomenal breakout in gold prices during the past two months.

[Buy] shares of the Nuveen Multi-Currency Short-Term Government Income fund with a Buy Under price of $20. A further decline in the US dollar should provide the catalyst for JGT's shares to trade at a premium to its NAV in the months ahead. My one-year price target is $22, giving us a forecasted total return of better than 28%.

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