Good Bonds Come From Faraway Places

For years, the most common tactic for U.S. investors in the bond market was to stick close to home, buying federal, state and corporate bonds. But now some are venturing halfway around the world in the search for higher returns.

The reason: Some nations now have interest rates that are far higher than they are in the U.S. Stable places such as South Korea, along with up-and-coming nations like Brazil, have manageable levels of debt (unlike many U.S. states and companies) but higher interest rates. This gives U.S. investors an incentive to buy their bonds. In Australia the 10-year government bond now pays about 5.7 percent, compared with 3.4 percent for a 10-year U.S. Treasury.

In South America, Brazil’s seven-year government bond yields 13 percent in the local currency, the real. This fat yield reflects the volatile nature of the real. “We’re in risk-taking mode,” says Chris Diaz, co-manager of the $247 million ING Global Bond fund, who has invested 13 percent of the fund’s assets in Brazilian debt. Investors can get these bonds individually if they have enough money in their brokerage account, but for most investors, a foreign bond fund might be the best option. Don¹t forget to tell the IRS, too. Investors must report all earnings from foreign investments, whether it comes from bonds or bond funds.

Pimco Foreign Bond
(PFOAX and PFUAX)
One-year return: 19.3 (PFOAX); 31.0% (PFUAX)
Expenses: $115 per $10,000
(PFOAX); $130 per $10,000 (PFUAX)
Comment: Both funds invest in established overseas economies. One hedges against foreign currency fluctuations (PFOAX); the other does not.

Templeton Global Bond
(TPINX)
One-year return: 25.0%
Expenses: $92 per $10,000
Comment: The diverse fund¹s largest holding is in South Korean Treasury bonds. Its currency exposure is nearly evenly split between the U.S. dollar and foreign currencies.