Could You Benefit from Foreign Bonds?

Adding geographic diversity to your portfolio with foreign bond funds.

Sometimes, readers send in questions. I am always happy to answer them. Recently, I received this question from a reader:

I am interested in diversifying to more foreign investments. Does it make sense to include foreign bond funds in my portfolio?

Of course, the answer varies from person to person, and depends on your own risk tolerance and ultimate financial goals. There are a number of low cost mutual funds and ETFs that you can choose from, including those that offer foreign investments. Additionally, foreign bond fonds are becoming increasingly popular as investors look for yield.

It's hard to get excited about Treasury yields right now, so it makes sense to look elsewhere.

Where to Find Better Bond Yields

Of course, you can find pretty amazing bond yields if you look to many eurozone countries right now. Spain and Italy offer quite attractive yields. However, there is risk there. After watching the haircut private bondholders took in the Greek bailout deal, it's hard to imagine too many regular folks getting excited about risking their money on anything connected to the eurozone. It's just too volatile over there right now.

Another option is to consider emerging markets. While you might see some risk from Brazilian bonds, they seem like a reasonable choice right now. Other emerging markets, like Poland and South Korea, are also offering interesting options that seem a little more stable right now (although there is always the risk of loss).

Finally, bond yields are a little bit higher in Canada and Australia than in the United States. These are developed economies that are backed by vast natural resources. As a result, bonds from these countries are looking better and better. You won't see the same high yields evident in emerging market countries, or in stressed European countries, but you'll likely see a better yield than what you would get with US Treasuries.

Realize, though, that there are other risks involved with foreign bonds. Accounting standards might not be as transparent, and you run into currency risk. So choose carefully if you decide to invest in foreign bonds.

What about Foreign Bond Funds?

Of course, my reader wanted to know about foreign bond funds. Funds offer you the chance to invest in a variety of assets, providing instant diversity. This can be a real advantage in the long run — especially since some of the more popular companies are starting to offer bond funds that provide the ability to invest in a variety of countries' bonds. You do have to watch out for higher prices, though. Some of these bond funds, like the Templeton Global Bond, have sales loads.

You can look for cheaper alternatives, and they are out there. You can find bond funds that focus on developed countries, and those that focus on emerging markets. You can also look to Vanguard, which is rolling out new bond index funds (hooray for low costs!). The Total International Bond Index Fund looks very promising, since it includes a variety of corporate and government bonds in a number of countries around the globe. Vanguard is also expected to offer an emerging market fund.

If you want a little more foreign exposure, and if you are looking for yields that beat Treasuries, it can make sense to consider foreign/global bond funds. Just make sure you do your due diligence before investing, and ensure that what you choose works with your own investing goals.

Image source: ToastyKen via Flickr

3 thoughts on “Could You Benefit from Foreign Bonds?”

  1. Ken Faulkenberry - AAAMP Blog

    In general, with interest rates at historic lows, I prefer a combination of dividend growth stocks and cash to replace the bond asset allocation in a portfolio.
    However if one chooses to add bonds to a portfolio having some emerging market bonds is a good diversification strategy.

    1. Miranda Marquit

      I’m not that into bonds, either 🙂 But I did get a question about it, and I think that it’s a solid strategy if you are looking for bonds, and want a little more yield than what you’d get with Treasuries. But you do have to be careful, since there are risks involved.

  2. The answer to this question is contingent on why you want foreign bonds. If you’re looking for a low risk investment then any of the AAA or AA+ bonds are going to be about the same. You’ll never get a great yield but you have essentially zero default risk. If you buy US treasuries you’ll get the same effect so this is a wash.
    If you are looking for risk then sure, you can gamble it up on on lower rated bonds but the risk is huge. If Greek debt is too calm for you’ll love Africa; 13% yields on 10 years bonds don’t come without defaults. Also these markets are not as liquid as AAA binds so keep that in mind; you can’t chicken out as easily.
    If the point is simply to add more instruments that aren’t as tied to the U.S. then I guess something like Dubai is ok. They just sold some 10 year notes at a rate around the same as Italy. However, I buy bonds because they are super low risk so I don’t see a point in chasing steam in a foreign credit market I know very little about. Maybe a sovereign debt fund will do better but, I’m not sure what evidence there is that they do well when the economy blows up. They’ve been hammered for the last two years. If you want to move out of the US markets why not buy baskets on the Nikkei, Hang Seng, S&P 1200, FTSEurofirst 300, Ibovespa, FTSE 100, etc.. and a basket of currencies. Lower risk than junk debt but less tied to American fiscal policy.

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