I read a book about asset allocation that suggested investing into international bonds. How does one do this? I am more interested in individual bonds versus bond funds.
The usual caveat is buy a mutual fund that specializes in international bonds, but if you are interested in buying individual bonds, most brokers can help you. Not sure how to buy bonds directly without the broker except for US Treasury bonds.
Bond mutual funds are interest rates bets. If they are held long enough, the flucuations due to the interest rate changes may be less of a factor. Given that interests rates are at 40 year lows, returning to the mean will guarantee some principle loss.
You can buy foreign bonds directly through your broker. Out of curiousity, what's your reasoning behind investing in individual foreign bonds as opposed to a fund?
When interest rates rise, the bond values decrease. The valuation of the fund is the collective value of all of the bonds that the funds hold. If you hold the bond fund for say 5 years and the interest rises in that time, your total return from the bonds will have a positve interest return and a negative principle return. If instead you bought an individual 5 year corporate bond, at the end of the term you would have a positive interest return and no principle return. Thus, inidividual bonds held to maturity do not have an interest rate risk. Investors who hold individual bonds can use "laddering" to take advantage of interest rate increases over the years.
My broker got all fuzzy eye on me when I bought up international bonds. I suspect that international bonds are not an asset class that most investors are into.
Ok, you're planning on holding to maturity. Correct me if I'm wrong(more of an equity guy), but aren't bond funds inherently laddered? I would assume that as individual bonds within a fund mature, the principle received is reinvested at current rate? Maybe use the word Yankee bond with your broker and he'll recognize some. Here's a couple of CUSIP's: 233835AD9, 09774LAA6 It looks like Daimler Chrysler has a bunch at varying face values-all seem to be rated low.
Just a note about the link I posted...I've heard that their commission markup on foreign bonds can be rather high so make sure to get all the particulars of the transaction before you trade w/ them.
buying individual corporate bonds does have some risk involved. If the company goes south, you can lose your principle. Most of the retail investors don't buy individual bonds, they let the institution guys manage the bond funds. The big guys have way more analytical tools than you do, and can access a lot more information. Also, there are a lot more than just corporate bonds.
That was my thought exactly. Its alot harder to price these suckers individually. Another worry would be low liquidity--if your broker gets fuzzy eyed I would think they're not very liquid.
Needless to say, I am only interested in "investment grade" corporate bonds, e.g. AAA for US corporate bonds. I do not know for sure but would be very suprised if Euro coporate bonds did not have similar rating agencies.
Actually, I have seen some so called "AAA" grade bonds go sour real quick, although Moody and S&P try to do their best. Bond trading (investing) does requires a lot of reserch work.
You may be correct. My plan is to hold the bonds as long as their rating is still investment grade. Of course, if a bond rating drops its fair market value will also likely drop, so any bond I would sell before its term would likely yield a loss in principle.
Don't you have to worry about exchange rate fluctations as well? It seems like a bit more work than investing in individual stocks and I have enough trouble as it is making myself monitor my stocks once every six months or so. How much time do you spend and how frequently do you monitor your stock investments? Just curious.
i've been learning more about bonds now since i am doing my series 7 licensing. i still don't see the point in buying them over buying stocks. even just buying an index fund and accumulating more when prices drop you'll be better off than with bonds. even buying at the exact worst times over the past like 5 decades i think you're still up like 13+% a year if you just bought the index compared to 15+% if you bought the perfect bear market bottoms. if you fear deflation then i guess i can see why you might be considering bonds, but the deflation fears seem to have been unfounded since they never came close to happening. stocks will still consistently outperform bonds big time over the long run. i won't even go into what to buy because that is irrelevant for this thread. buy if you just buy index funds you'll be fine. bonds seem like too much work without the reward. there is much more of a reward by dealing with stocks and even if you don't want to work with stocks there is still more a reward by just holding an index fund. no work...no fees...free money...stocks always go up. further...this is not the time of the decade to be out of the market. the bookends of the decade are traditionally the worst performing and the middle is by far traditionally the best. i'll shut up or i'll start talking about stocks even more and i won't stop.
There are several types of "international" bonds. You can avoid exchange rate rick by investing in Yankee bonds. These are foreign bonds that are issued in US. It would be tough to monitor individual international bond positions other than following interest rates. A primary component of bond valuation is default risk(like deepblue said), which I think would be hard to pin down on foreign companies unless you're working overseas in the field. Example Enron vs. Parmalat. Few US investors could properly peg down Enron's default risk, and I think even fewer were able to estimate Parmalat's risk.
The original poster is obviously more educated in investing beyond your day-trading garbage if he's asking how to invest in international bonds. Did you ever read up on portfolio theory as I suggested several months ago? If you did and still can't understand the value of investing in bonds as a diversification tool you need to read more carefully.
I have never heard of Yankee Bonds and will need to look into those. The exchange rate is the main risk that I see with international bonds (as well as stocks). My plan is to only invest in Euro based bonds (or Yankee Bonds backed by Euro companies). BTW I would be very surprised if Enron was issuing investment grade bonds anywhere near their fall. SP hopefully sees junk for what it it.
I won't claim to be too knowledgeable in this subject, but I can tell you that international corporates are traded to the retail investor. You might just need a different broker. My broker has offered me South America's Coke bottler Embotelladora bonds paying 9.875%, rated Baa3 this week I bought a little.
