Overseas Bond Funds Benefit From Dollar Decline

by Alan Lavine and Gail Liberman

One of the easiest ways to benefit from the falling value of the U.S. dollar may be through international bonds. Nasri Toutongi, manager of the Hartford Total Return Bond Fund, expects overseas bonds to register total returns of at least 12 percent this year.

Historically, changes in foreign currency values have played a larger role than interest rates on the total return of overseas bonds. And nearly half of last year’s foreign bond fund total returns were due to the decline in the dollar. 

“We expect the dollar to decline by another 10 percent against the euro due to the current (U.S. trade) and budget deficits,” Toutongi says. “We see opportunities in foreign government bonds, particularly western European bonds. They offer safety and can benefit from currency appreciation.

“While we expect yields on U.S. bonds to rise due to the strong economy and an increase in the Federal Reserve rate, we expect western European government bonds will decline in yield.” He cites U.S. monetary policy coupled with the weak economy as chief reasons.

Toutongi believes that bonds represent a better way to benefit from the decline in the dollar than stocks. That’s because bonds move more directly in line with economic factors, such as interest rates, government deficits, and trade imbalances. Stock prices, on the other hand, can be affected by more factors, such as news about a company or whether the stock is undervalued or overvalued.

If you want to invest in foreign bonds, it’s often best to stick with a professionally managed mutual fund. Investors pay a pay a big mark-up when the buy individual foreign government bonds. Bond funds get better prices due to large block purchases. In addition, bond fund managers can hedge against currency losses when the dollar begins to gain strength.

Toutongi favors German, French and Italian government bonds that mature in two years. The bonds yield 2.5 percent. He also likes Australian bonds, which yield more than 5 percent. Although Japanese bonds sport low yields of up to 1 percent, the yen should also strengthen against the dollar. 

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "Rags To Retirement," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.