By JACK HOUGH
Investors who find Treasury yields too meager can choose from a long menu of meatier government bond yields abroad.
But finding the right combination of risk and return is getting trickier.
Most investors hold a sizable chunk of government debt in their bond portfolios, for safety more than the income the bonds generate. Not long ago, that slice consisted of one kind of bond: U.S. Treasurys.
But the relationship between yields and risk in government bonds has taken an odd turn. As a result, even cautious investors should consider branching out from the U.S. to places like Australia and Mexico.
Among the factors that determine the credit-worthiness of governments are how much they owe, the size and growth rates of the economies they oversee and the inflation rate. While heavy debtors might be expected to offer higher yields, as in the corporate-bond world, this isn't always the case with government bonds.
Central banks in the U.S. and Japan, in an effort to boost economic growth, have bought bonds aggressively to reduce yields, which move in the opposite direction of prices.
As a result, bond yields in these countries are artificially low now, says Shane Shepherd, head of fixed-income research at Research Affiliates, an investment firm in Newport Beach, Calif. The 10-year Treasury yield is just under the latest annual inflation rate of 1.7%.
Treasurys remain a top choice for investors who value short-term safety over long-term growth because they carry negligible risk of default, says Erik Weisman, a portfolio manager at fund company MFS Investment Management.
But investors who are seeking higher yields without a lot of extra risk should look to the likes of Australia and New Zealand, Mr. Weisman says. Both countries have manageable debt levels and potential for healthy economic growth, and their currencies are likely to hold their value a key consideration for foreign-bond buyers, Mr. Weisman says. Australia and New Zealand 10-year bonds yield 3.0% and 3.3%, respectively.
For investors who want higher yields and don't mind additional risk, Ian Kelson, head of global fixed income for $555 billion asset manager T. Rowe Price Group (TROW),
For similar reasons, Krishna Memani, director of fixed income at $173 billion money manager OppenheimerFunds, also likes Mexico, along with Brazil (with a 10-year yield of 10.2%) and Indonesia (6.5%).
For his part, MFS's Mr. Weisman thinks Mexico, South Africa and Turkey (8.6%) offer good value.
Some caveats are in order. Bonds in nations like Mexico and Indonesia, even government ones, can be volatile. "Those yields aren't high for nothing," says Tina Vandersteel, portfolio manager at GMO, which oversees $105 billion.
And for all the talk on Wall Street about global investing, it isn't especially easy for U.S. customers to buy foreign government bonds directly. For example, Charles Schwab doesn't list them with other bonds on its website. Customers must call in and request them, at which point a broker will get prices from outside dealers.
Fees are assessed case by case, and while there isn't a minimum purchase, "we have a hard time finding securities for customers who want to spend less than $100,000," says James Grady, vice president of fixed-income trading.
Jacksonville, Fla.-based EverBank, known for its foreign-currency certificates of deposit, also specializes in foreign government bonds through its brokerage arm. The minimum purchase is $20,000 and fees are typically 0.75% of purchase amounts up to $100,000, 0.5% for amounts up to $500,000 and 0.375% for larger amounts, says Frank Trotter, president of EverBank Direct, which oversees the brokerage business. Investors can choose from 14 countries, but neither Turkey nor Indonesia is among them.
Mutual funds offer an easy path to diversified foreign bond exposure, and fund managers are experienced enough to go beyond government bonds into attractive corporate issues, too. But beware high fees. Many such funds have sales charges of 4% to 5% and continuing fees of more than 1% a year, a high price to pay for the privilege of collecting an extra point or two per year in yield.
T. Rowe Price charges 0.83% for its International Bond
Index funds are even cheaper, but most weight countries by bond market size, favoring heavy debtors. SPDR Barclays Capital International Treasury Bond (BWX)
More options might be on the way. Research Affiliates and Citigroup (C)
Such approaches could help investors diversify smartly. Remember: A credit-card issuer wouldn't charge the lowest rates to customers who carry the most debt. Treasury holders should think likewise by shifting a portion of their funds to countries where debt levels are lower and yields are higher.