{"id":7358,"date":"2014-01-27T06:00:38","date_gmt":"2014-01-27T14:00:38","guid":{"rendered":"http:\/\/www.marketriders.com\/investing\/?p=7358"},"modified":"2016-12-21T07:28:12","modified_gmt":"2016-12-21T15:28:12","slug":"how-to-invest-in-foreign-bonds","status":"publish","type":"post","link":"https:\/\/www.marketriders.com\/investing\/how-to-invest-in-foreign-bonds\/","title":{"rendered":"How to Invest In Foreign Bonds"},"content":{"rendered":"

If you want a truly spine-tingling investment ride, you likely could do no better than foreign government\u00a0bonds, also known as “sovereigns.”<\/p>\n

The risks are multiple: Beside the typical risks of\u00a0bonds, such as interest rate risk and\u00a0inflation risk<\/a>, you have to add on top currency risk, political risk and repayment risk.<\/p>\n

The reason that emerging-market sovereign pays a fat yield is\u00a0all that risk<\/a>. Let’s break it down a bit:<\/p>\n

Interest rate risk<\/strong><\/p>\n

This is the easiest to understand.\u00a0If interest rates rise, the market-price (resale) value of your bond can fall dramatically. For example, if you own a 10-year bond paying 4% and rates rise to 6%, very few people will be interested in taking on your old\u00a0bonds\u00a0without a cut in price to offset the difference in income.<\/p>\n

\"how<\/a><\/p>\n

Inflation risk<\/strong><\/p>\n

If you\u00a0buy a bond<\/a>\u00a0at a set interest rate, say 5%, your real value will be determined by how much inflation eats away at the yield. So, if inflation is 2%, your real payout will be the difference of 3%.<\/p>\n

Sounds simple, but foreign inflation rates can be quite high. A bond paying 12% is suddenly less attractive if local inflation is running at 10%.<\/p>\n

<\/div>\n

Currency risk<\/strong><\/p>\n

Say you own a bond priced in an obscure European currency. It does okay, yielding 7%, but when you go to move your money back into dollars (or euros or yen) you find the exchange rate is working against you, wiping the yield to maybe 2%. Now you’ve just kept up with inflation, not quite the investment you wanted.<\/p>\n

Political risk<\/strong><\/p>\n

Investors flock to higher yields but few take a moment to question the rush. Is the government issuing the bond stable? Is there rule of law? How do the court systems work?<\/p>\n

Experienced bond traders have rows of analysts working around the clock to produce up-to-the-minute insights into these issues. Such information might be priced in, but not always. A sudden turn of events or change of government can\u00a0torpedo your investment<\/a>\u00a0without warning.<\/p>\n

Repayment risk<\/strong><\/p>\n

The ultimate bond nightmare: The country is broke and repudiates its debts. It’s hard on the nation in question, for sure. They’ll be dealing with years or decades of austerity and little access to fresh credit. For bond investors, however, it might mean a haircut of 50% or 90% or all of it, gone with the wind.<\/p>\n

How can a retirement investor get into this market? Very, very carefully. One good way is to avoid the direct investment route and instead own a broad\u00a0exchange-traded fund (ETF)<\/a>\u00a0that holds many sovereign\u00a0bonds.<\/p>\n

Using an ETF, you get the exposure to the asset class in a precise measure without taking on the immense risk of a single country’s fortunes. And you can do so inexpensively, through a liquid, traded security in your own home market.<\/p>\n

Sovereign\u00a0bonds\u00a0are an important part of a\u00a0balanced retirement portfolio<\/a>, so long as you take measured risks in doing so.<\/p>\n","protected":false},"excerpt":{"rendered":"

If you want a truly spine-tingling investment ride, you likely could do no better than foreign government\u00a0bonds, also known as “sovereigns.” The risks are multiple: Beside the typical risks of\u00a0bonds, … Read more →<\/span><\/a><\/p>\n","protected":false},"author":8,"featured_media":7361,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_wp_rev_ctl_limit":""},"categories":[4],"tags":[62,42,43],"yoast_head":"\nHow to Invest In Foreign Bonds | MarketRiders<\/title>\n<meta name=\"description\" content=\"If you want a truly spine-tingling investment ride, you likely could do no better than foreign government bonds. 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