International bond funds have been standout performers recently, aided by a weakened dollar. The world bond category ranked fourth in total...
International bond funds have been standout performers recently, aided by a weakened dollar. The world bond category ranked fourth in total returns for the past month through Tuesday, according to Morningstar. The group ranked behind funds focused on precious metals stocks, natural-resources stocks and long-term U.S. government bonds.
As foreign currencies strengthen against the dollar, euros, British pounds and Mexican pesos become more valuable to U.S.-based investors. The dollar has been in near-freefall recently, undercut by Federal Reserve rate reductions amid a stumbling U.S. economy.
Foreign bonds are seen as safer than foreign stocks, but they’re not without risk. Merrill Lynch Chief Investment Strategist Richard Bernstein likes global bonds, but only ones with top AAA credit ratings.
“The yields on sovereign debt of many developed countries are higher than the yields on Treasurys, and they offer some protection against U.S. dollar weakness,” he says. He warns, though, that if the dollar rallies, international bonds would likely underperform. Currencies are notoriously volatile.
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Some world bond funds hedge against currency fluctuations. Such funds haven’t performed as well as unhedged funds recently.
Morningstar senior fund analyst Paul Herbert says world bond funds tend to have high expenses. “Your returns are going to be in single digits in these things, and I think these fees should be lower,” he says. His top picks include Loomis Sayles Global Bond (LSGLX), which has a 1 percent expense ratio, and a 4.7 percent yield, and T. Rowe Price International Bond (RPIBX), which has a 0.84 percent expense ratio and yields 3.3 percent.
Bonds from developed markets, such as Europe, generally have lower risk than ones from emerging markets. Russia famously defaulted on its bonds in 1998 and Argentina did so in 2002.