Tuesday, December 8, 2009

Don't Neglect International Bonds

Oddly, most U.S. investors have a significant portion of their investment portfolio in foreign stocks, but few have allocated a portion of their resources to international bonds. Traditionally, domestic investors have a home-country bias, and prefer U.S. Treasury bonds, municipal bonds, and U.S. company debt.

However, the weakening dollar and low yields on U.S. Treasury bonds have made the case for adding foreign-bond exposure to a fixed-income portfolio more persuasive. First, a portion of overseas bonds may provide a hedge against further weakening of the dollar, which is just off it's all-time low against the euro. Second, yields on international bonds are currently significantly better than yields on U.S. bonds, even in many relatively safe countries with stable governments and economies. For example, Australia's two-year government bond now yields 4.4% versus 0.8% for a U.S. Treasury of the same maturity.

Besides, the debt of some foreign governments may look safer than the bonds issued by cash-strapped U.S. cities and states. For instance, are you currently standing in line to own California state bonds and have exposure to their budget woes?

At Net Worth Advisory Group, each of our clients have always had a portion of their nest egg invested in international debt. On average, I would recommend about 30% of a fixed-income portfolio be allocated to foreign bonds. With questions about how international bonds fit into your investment strategy, please don't hesitate to get in touch with me.

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