Foreign Bond Funds Offer Juicier Yields

NEW YORK (TheStreet) -- With investors racing into Treasuries, yields recently touched record lows.

To get fatter yields, consider foreign bond funds.

Although 10-year Treasuries currently yield 2.08%, comparable bonds from Australia yield 5.0%, and Brazilian issues yield more than 11%.

Besides offering greater potential returns, foreign funds can help to diversify portfolios. Bonds from countries such as New Zealand and Switzerland don't move in lockstep with U.S. markets.

Foreign bond funds also can provide the chance to profit from the falling dollar. When the dollar dips, the values of foreign bonds rise for U.S. investors. That has happened in recent months and helped to boost the total returns of foreign bond funds.

How much of your portfolio should go into foreign bond funds? Consider putting 10% to 20% of your fixed income allocation into foreign bonds. By buying a top fund, you may boost returns and protect against trouble in U.S. bond markets.

To take a cautious step into foreign bond markets, consider Putnam Global Income (PGGIX), which has returned 9.0% annually for the past five years, outdoing 83% of peers.

The fund holds a mix of foreign and U.S. bonds, emphasizing high-quality issues in developed countries. Worried about debt problems, portfolio manager Bill Kohli is shunning most European countries, except Germany and Netherlands.

"We are waiting to see whether the Europeans can come up with a solution that averts disaster," says Kohli.

When Kohli has a neutral outlook on global markets, he keeps 55% of assets in foreign currencies and the rest in dollars. These days the fund has a 71% exposure to the dollar. Kohli is concerned that problems with the euro and yen could cause those currencies to weaken. He figures that the dollar could record a comeback.

"The dollar is very cheap right now, and it could surprise the markets by recovering," he says.

To hold a big stake in emerging markets, consider Oppenheimer International Bond (OIBAX), which has returned 8.8% annually during the past five years.

In its neutral position, the fund has 30% of assets in emerging markets and most of the rest in developed foreign countries. Currently wary about Europe and Japan, Oppenheimer is keeping 50% of assets in emerging markets.

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