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Go Global for Bonds

- Alan Lavine and Gail Liberman

Foreign bond funds may be a way to earn high yields and positive returns over the next few years

This could be good news given that U.S. bond investors are expected to give back some gains if interest rates rise.

So far, foreign bond funds have outperformed domestic bond funds in the recent past. Over the past year, international bond funds are up 6.34 percent. By contrast, the average U.S. bond fund is up just 3.1 percent.

Art Steinmetz, manager of the Oppenheimer International Bond Fund, says that foreign bonds act somewhat independently of U.S. bonds.

His fund yields almost 6 percent today. Plus the fund total return is up 16 percent this year. Total return includes reinvestment of income plus the percentage increase in the value of the bonds.

"The rally in U.S. government bonds is over because higher rates are on the horizon over the next 12 months," Steinmetz says. "But emerging market bonds are going to benefit from the U.S. economic recovery. And as the dollar declines in value, bonds purchased with foreign currencies will appreciate in value."

Steinmetz favors investing in non-Middle Eastern oil producing countries. If we go to war with Iraq, oil prices will shoot up. Even if we don't, a strong economy will keep oil prices higher than they have been in the past. As a result, his bond fund has a large stake in Mexican, Russian, Venezuela and Columbian bonds.

He also owns bonds issued by Guatemala, the Dominican Republic, Chile, Belize and El Salvador. These countries have strong agricultural exports and benefit from tourism. They should benefit from a strong U.S. economy About half of his holdings are invested in Europe. The decline in the dollar should boost the value of Euro-denominated bonds. He also expects that the European central bank will cut interest rates. As a result, bond price should appreciate.

The fund has limited exposure in Asia. The reason: Yields are lower. But the fund does own Philippine, Korean and Indonesian bonds. Overall, Asia currencies are tracking the U.S. dollar so there is less foreign currency profit potential.

If we go to war with Iraq, Steinmetz says he will move out of emerging market bonds because they are more volatile than bonds issued by industrialized countries.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

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