Dollar bills 370.
(photo credit: Steve Marcus / Reuters)
The recent panic over the dreaded Federal Reserve “Taper” sent bonds the world
While both US Treasury and corporate bonds dropped the
real carnage was in global bonds and especially emerging market bonds. Emerging
market bonds dropped nearly 15 percent. So why would someone in their right mind
want to take a look at investing in this asset? After all, bonds are generally
considered to be “safe” investments, and a 15% drop doesn’t sound all that safe.
Throw into the mix that there is an added risk when investing in global bonds
and that’s currency risk.
All is well when the US dollar is weak, but as
it begins to strengthen the value of these bonds can drop as well.
is what happened in the recent market turmoil.
Currencies that had been
considered safe and strong suddenly got crushed to the tune of 15%-20% in a very
short time period. So again I ask why would someone want to invest in this?
Well, because of the old investing rule; buy low and sell high.
recent rout portend a bigger trend, or is the move destined to be short-lived?
There is no real way to answer that question.
My mother used to be fond
of saying that “prophecy was given to fools.” Trying to predict currency
behavior over the short term is near impossible.
What should we do? For
investors who need some more income to meet their retirement goals, or who are
looking to diversify the fixed-income part of their portfolios, it may be time
to start thinking global.
For fixed-income investors, the 1%-2.5% that
bonds are yielding doesn’t cut it. To generate much-needed income, investors
have turned to high-yielding, dividend- paying stocks that, despite their
current popularity, are ultimately stocks and can get crushed like any other
stock (turn the clock back 15 years to Citigroup and General
Foreign-currency bonds As such, investors may want to take
advantage of cheap currencies and higher yields. If a 2% return is not enough to
meet your needs, take a look at bonds that trade in foreign currency. While it
used to be difficult to buy these bonds, nowadays most brokerage firms have the
ability to purchase bonds in various currencies.
For example, a highly
rated (AAA) bond in Brazilian reals can yield over 8%. A similar bond in
Australian dollars will be over 4%. What makes these bonds even more attractive
is that the currencies have been creamed of late against the US dollar; not only
do you get the high interest rate, you also have the potential to profit from
the appreciation in the currency if some normalcy returns to the
If you can get a 4%-6% interest rate and a stable or appreciating
currency, you are way ahead of the game and will be able to meet your retirement
goals with even less than $1 million in the bank.
For investors who want
this exposure but are gun-shy about actually buying foreign-currency bonds,
there are plenty of exchange-traded funds out there that can do the job. The
iShares S&P/Citigroup International Treasury Bond Fund or the iShares
JPMorgan USD Emerging Markets Bond Fund are both worth looking at.
bond funds For investors who would rather not speculate in specific currencies,
but would prefer professional management as opposed to the more-passive ETFs,
one can invest in a global or an emerging market bond fund. This is a managed
portfolio of bonds that are denominated in multiple currencies.
advantage of this route is that there is a paid manager who is an expert in
currencies who manages the portfolio for you. In addition, since it’s a bond
portfolio, you also get monthly interest payments. However, be aware that a fund
like this can also lose money and is not guaranteed.
It is important to
note that past performance is no indication of future results, and with both of
these options, if the US dollar gets stronger against the world’s major
currencies, you can end up losing money. I am not saying to put all of your net
worth in these types of currencies, but some exposure can potentially make a big
difference in your retirement.
Speak to your financial adviser to see if
you can enhance retirement income by incorporating foreign bonds into your
The information contained in this article reflects the opinion
of the author and not necessarily the opinion of Portfolio Resources Group, Inc.
or its firstname.lastname@example.org Aaron Katsman is author
of the book Retirement GPS: How to Navigate Your Way to A Secure Financial
Future with Global Investing, and is a licensed financial professional both in
the United States and Israel.