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CAPITAL MARKETS

Portfolio Strategy: US bond investors look abroad

Rising interest rates and a weakened dollar inspire U.S. bond investors to look abroad. But foreign forays are not without risk.

This article appears courtesy of DailyII.com


Leaving Home By Eric Uhlfelder 08/13/06 The wiliest U.S. bond investors have hit the road. Global debt portfolios have significantly outperformed their U.S. counterparts, reports Morningstar, the Chicago-based research firm. Over the three years through August 2, global bond funds outperformed U.S. intermediate-term bond funds by an annualized 198 basis points; over the past five years, they have returned nearly 300 basis points more annually.

What explains the relative strength of foreign bonds? First, interest rates in other developed countries are not rising as fast as those in the U.S., which means that bond prices are not falling as rapidly. As of early August the FTSE U.S. government bond index was yielding 5.12 percent. The only developed-market sovereigns paying more were those of Australia and New Zealand. Second, many foreign currencies are appreciating against the dollar, which translates directly into gains for dollar-based investors.

Bond investors in the euro zone, Japan, the U.K. and even Canada have seen domestic negative total returns so far this year through May. But as Joseph Di Censo, global fixed-income strategist at Lehman Brothers, explains, “When you factor in the falling currency, dollar-based returns are solid, led by sterling bonds, up 7.03


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