investing abroad at home

Foreign bonds offer more risk and higher returns

Earn more than 13% on a government bond? That sounds pretty tempting in today’s low-yield world, but there is a catch: The government issuing the bond is Jamaica, and U.S. Standard & Poor’s rates the bond B, a long way from its top AAA rank, so investors have to bear some risk to receive that 13%-plus payoff.

Welcome to the world of foreign bonds. Savvy investors can earn handsome returns, but only if they know the territory. You can either buy the securities or invest through funds (see chart). To begin, foreign bonds come in two major categories:

Developed nations. Bonds issued in Canada, Europe, Japan, and other countries where financial markets are relatively efficient. Bond yields tend to be comparable to American yields, or lower, reflecting risks familiar to U.S. investors.

Emerging markets. The developing world, from Jamaica to Jordan, also may issue bonds; most emerging markets bonds are issued in Argentina, Brazil, and Mexico. Yields tend to be much higher here because investors run risks ranging from currency collapse to overthrow of the government.

Wherever bonds come from, they fall into either of two classes:
Government bonds. These bonds are backed by the issuing governments and their agencies. These agencies are naturally reluctant to default because lenders, once burned, won’t provide more funds. Some are called “Brady bonds” (after Nicholas Brady, former treasury secretary under Presidents Reagan and Bush), which are partially backed by the U.S. government.

Corporate bonds. Foreign companies may issue bonds, just like AT&T and GE. The yields and the credit quality of these bonds vary widely, from company to company.

Why invest in any of these types of foreign bonds? The high yields offered by emerging markets bonds may be appealing. “Some investors feel reassured by bonds issued by sovereign nations, which may be unlikely to default,” says Charles de Vaulx, portfolio manager, First Eagle Sogen funds. “Some of the bonds are denominated in U.S. dollars, so there’s no currency risk, either.”

By currency risk, de Vaulx refers to the possibility that a foreign currency may lose value vs. the U.S. dollar. If a foreign bond pays 15%, but its currency is devalued by 20%, American investors wind up losing money.

TOP 5 INTERNATIONAL BOND FUNDS

Fund Name (Ticker)

Year-to-Date Total Return*

12-Month Total Return

12-Month Yield

5-Year Ann.Total Return

Toll-Free Number

Minimum
Initial
Investment

Alliance North Am Govt Inc A (ANAGX) 10.86% 19.04% 11.14% 16.11% 800-227-4618 $ 250
MainStay Global High Yield A (MGHAX) 8.52 23.00 9.13 N/A 800-624-6782 500
BlackRock Intl Bond Svc (CIFIX) 5.68 5.81 6.36 8.56 800-441-7762 500
Payden & Rygel Global F/I R (PYGFX) 4.76 6.05 6.19 7.33 800-572-9336 5,000
Smith Barney Global Govt A (SBGLX) 4.74 4.51 8.03 6.43 888-451-2010 1,000
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