International Bonds Do Well If U.S. Dollar Weakens

by Alan Lavine and Gail Liberman

It makes sense that many have turned to bonds as a safe haven from the volatile stock market. Bonds typically perform well when stocks plunge.

Lewis Altfest, editor of the Altfest Advisory Letter, New York, recommends investing in professionally managed and diversified international bond funds. The reasons: The European currency, called the "Euro," should appreciate against the value of the U.S. dollar. Plus, overseas bonds generally don't move with U.S. stocks. So you get diversification.

"A relatively low-risk way to play the cheap Euro is through high- uality international bond funds," Altfest says. Altfest says that international bond funds yield about the same as U.S. bond funds. But he says the dollar currently is overpriced. When the value of the U.S. dollar declines, the value of international bond funds should rise. U.S. mutual funds convert dollars into foreign currency to buy overseas bonds. So when the dollar declines, the value of the bonds increases.

"We believe that high quality international bond funds with low expenses are likely to provide surprisingly good performance," Altfest says. Of course, if this scenario doesn't play out, international bond funds could do poorly. There are more risks to deal with when you invest abroad. There is risk that the foreign currency could drop in value. There also is risk of a government crisis or an overseas economic crisis. If interest rates rise, bond prices fall.

A stronger dollar can cause lower overseas bond prices. If the wrong political party gets elected overseas, those markets could plunge. Bad news about a company or industry also can send stocks into a tailspin.

If you do invest in an overseas bond fund, make it a small part of your overall mutual fund investments. The best-rated international bond funds, according to Morningstar Inc., Chicago, include Goldman Sachs Global Income Fund and the Payden Global Bond Fund. Both funds may hedge against foreign currency loss. However, if they are wrong, the performance of the funds could suffer.

The Goldman Sachs Income Fund is well-diversified and invests in high-quality corporate and government bonds. The fund tends to keep about 40 percent of assets in U.S. bonds. Morningstar calls  this fund's long-term track record "one of the best in its category." 

The Payden Global Fixed Income Fund is another top performer that invests in high-quality bonds. Nevertheless, it also can invest in risky junk bonds, so you don't want to put too much of your hard-earned cash into it.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "The Complete Idiot's Guide to Making Money with Mutual Funds," 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.

More articles by Al and Gail can be found here.