Want a Decent Yield on Cash Accounts? Head Abroad

Foreign bond funds are up an average 11.4 percent in the past year — trouncing most domestic bond funds as well as domestic and international stocks. Yet few investors own any foreign bond funds or any other fixed-income securities denominated in foreign currencies, says Joe Duran, CEO of United Capital Financial Advisers. "That doesn't make a lot of sense," he says, since interest rates are higher abroad, and foreign debt can help hedge against domestic bonds and stocks. Moreover, fund managers like Doug Noland, who comanages the Prudent Global Income fund, say the dollar is likely to stay weak for some time as the Federal Reserve cuts rates to prop up the U.S. economy. "We expect a long-term dollar decline," Noland says. He's been right so far: The fund rose 10.8 percent last year and is up 7 percent this year, propelled by the dollar's demise.

Naturally, currency swings can work both ways, hurting returns as much as helping. The 8.6 percent yield on six-month CDs denominated in South African rand, for instance, certainly sounds tempting. They're available through the Jacksonville, Fla.-based EverBank (and FDIC insured). But the rand is down 15 percent this year, as investors switched to more stable currencies, like the Swiss franc, says Chuck Butler, president of EverBank World Markets. One way to smooth the ride: a multicurrency CD. EverBank offers a dozen of them, each composed of three or four different currencies, such as the euro and Hong Kong dollar. Yields are lower, but so are the chances of a currency implosion wiping out your gains.

Another low-cost — and U.S.-based — way to go is with an exchange-traded fund, a basket of securities that tracks an index. State Street's new International Government Inflation-Protected Bond ETF holds 74 government bonds issued by both developed and emerging countries; payments adjust periodically, based on local inflation rates. With the dollar down so much, it's unlikely the ETF will rack up double-digit gains this year, says Robert Levitt, chief investment officer of Levitt Capital Management. But it will fare better than U.S. bonds should global inflation pick up steam, and its 2.9 percent yield provides a nice cushion in the meantime.

Michael Hasenstab, manager of the Templeton Global Bond fund, also thinks the euro looks pricey against the dollar; he now prefers the Swiss franc and Swedish krona. Switzerland and Sweden are running current-account surpluses, he notes, and their currencies should benefit from a global flight to safety. "Different currencies do well in different environments," he says. Who knows, you might even make it to Europe yourself.

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