YOU SHOULD think of international bond funds not as a standalone investment, but as a further way to diversify a portfolio. Consider the T. Rowe Price International Bond Fund, which was launched in 1986. In the 33 full calendar years since, the fund has lost money in 12 years. That’s hardly the sort of performance that would endear it to conservative investors.
On the other hand, the fund occasionally delivered strong returns at just the right time. During that 33-year stretch, the S&P 500-stock index (with dividends reinvested) lost money in six years—1990, 2000, 2001, 2002, 2008 and 2018—and the T. Rowe Price Group fund posted gains in three of those six years, thus helping to bolster a diversified portfolio’s performance at a time when its stock market investments were suffering.
An international bond fund can potentially post handsome gains either because foreign interest rates decline, pushing up the price of existing bonds, or because the dollar declines in value. The T. Rowe Price fund doesn’t hedge its currency exposure. But some international bond funds do hedge, either occasionally or all the time. This will make the funds less volatile, which might appeal to conservative investors.
Among providers of ETFs, BlackRock’s iShares and State Street’s SPDR have an extensive array of international bond funds. Meanwhile, you can purchase international or global bond mutual funds from companies such as American Century Investments, Fidelity Investments, T. Rowe Price Group and Vanguard Group. International funds invest exclusively abroad, while global funds own a mix of U.S. and foreign securities.
Next: Emerging Market Debt
Previous: Floating Rate Loans