In Search of Retirement Income—International Bond Funds
Some foreign governments may offer a higher interest rate on their bonds than the US Government does. Additionally, some foreign corporations might offer a higher interest rate than the US companies. For retired investors, this could be an opportunity to diversify in an area that offers potentially higher returns, more stable returns and a hedge against the value of the US dollar–all goals for sound retirement investing.
Also, international bond funds can provide diversification and potentially higher returns. International bond funds invest primarily in bonds issued by foreign governments and corporations. There are different types of international bond funds—single country, single region, global (which includes US bonds), and foreign (no US bonds included). There are also industry and sector funds—utilities, government, telecommunications, and so forth.
What are some other reasons to consider international bond investments? Interest rates can move in different directions throughout other parts of the world. For instance, when US rates are low, rates in other stable countries may be higher. The same could happen to movements in the stock markets. Of course, the opposite could also come about. }
When you buy international bonds or bond fund shares you are opting for the potential of higher returns in exchange for accepting some additional risks. For example, foreign markets are often more volatile than the U.S. markets. These investments involve other special risks, including currency exchange, political and economic uncertainties as well. Professional managers can sometimes help to mitigate these risks by monitoring international market developments and by adopting strategies to hedge against currency exchange rates. However, the additional time involved in managing these risks will usually result in higher management fees.
There are also international bond funds that invest in the area of emerging market bonds. Investing in emerging markets involves greater risk and potential reward than investing in more established markets. These markets tend to help when trade barriers are reduced (as is the case with NAFTA), or when privatization occurs in formerly communist or socialist countries. However, the risks associated with emerging markets include the risks relating to the relatively smaller size and lesser liquidity of these markets, high inflation rates, and also adverse political developments.
Investing a small percentage of your assets in international bond funds could potentially increase your income by giving you the opportunity to profit from growth in other economies. However, you should have a complete understanding of the associated risks of these investments.
The biggest risk (and potential reward) is the change in the currency rate relative to the US dollar. For 2008, you would have been well off being in the US dollar as it did well realtive to other currencies. But had you held Japanese Government Bonds, you could have gained 23%–just having your funds in a Japanese treasury bills as seen below (click on chart to see full view)
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Tags: Add new tag, bond investing, international bionds, international bond funds, international bonds
March 22nd, 2009 at 12:55 pm
I like the idea of protectiing assest and hedgeing inflation with income produceing bonds and stocks overseas. This way if doolar is high you can get more shares and when dollar goes down you earn more money.
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April 24th, 2009 at 9:01 pm
Interesting. Do most people consider investing their money in foreign bond funds as being more, or less risky, than regular stocks?
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May 6th, 2009 at 4:00 am
How would you recommend investing in the foreign markets? One the major hurdles for first time/potential investors is the lack of knowledge around these areas. I know brokers charge relatively fees for the transactions they process but there still needs to be some control over buying and selling of assets.
July 28th, 2009 at 10:23 pm
Investing internationally may not be a right option now. Never the less, $$ can be an exception. As this is going to be the income after retirement, I prefer peace of mind to higher returns in risky investments.
Steve.
July 30th, 2009 at 3:07 am
International bond fund net inflows have exploded in the past years as millions of investors made the proverbial flight to safety from the imploding dollar. But as interest in international bonds expands, even the biggest fund manufacturers don’t have enough products to meet the growing demand from advisers.
September 28th, 2009 at 3:56 pm
A lot of people get a thrill seeing high interest rates, and not take in to consideration currency exchange rate. Also the older you are you tend to seek simple less risky investments, and put everything in one basket. For too long people were sold the share market is safe. With so many larger companies going under will this ever be safe?
December 3rd, 2009 at 11:13 am
I do like the idea of geographic diversification. As you grow older, you look for more and more stability in your portfolio. Geographic diversification is just one more pillar in an effective diversification strategy that should include diversification among asset classes and tax diversification.
December 15th, 2009 at 8:30 am
Yes, and you can also do 3 way exchanges quite simply. If the currency that you hold funds in is very middling then plan to swap for any extreme fluctuation in overseas funds and them be prepared to swap for another currency before finally excahngin back to the country where you plan to spen it. This way you can make money whilst your chosen currency is in the middle of its historical value.