Greece Debt Crisis Takes Toll on Bond Funds

NEW YORK (TheStreet) -- Greece's debt crisis has dragged down global stocks. But ground zero is bond mutual funds.

It may be hard to tell if Greece isn't listed among the top 10 countries or is consolidated under the banner of "Europe." Not all mutual funds post their complete holdings on the Internet and, even if they do, you should know that Greek government bonds may be listed as "Hellenic Republic."

Greece's budget turmoil has spread across Europe, prompting talks among German Chancellor Angela Merkel, European Central Bank President Jean-Claude Trichet, the International Monetary Fund and the Greek government. Governments may have to guarantee bonds, and the ECB may have to lend more to banks.

The international bond fund most exposed to Greek government debt, at 5.4% of total assets, is the

Touchstone International Fixed Income Fund

(TIFAX)

. The fund invests in a portfolio of non-U.S. fixed-income securities with a weighted average maturity of 9.6 years, with only Germany, France, Belgium and the U.K. in higher concentrations than Greece.

Augustus Asset Managers, the manager of the fund, chooses securities by starting with macroeconomic factors including fiscal and monetary policies before selecting holdings. The firm may need to revisit its models. The year-end commentary from the Touchstone fund cited underperformance due to "country selection" from being overweight in the euro zone and the "purchase of Greek bonds in the early stages of spread-widening."

A rebound by Greece would benefit Touchstone. However, investors who expect the worst may want to steer clear of this fund.

There are international bond funds rated "buy" or "hold" without Greek holdings, including

Delaware Pooled -- International Fixed Income Portfolio

(DPIFX)

,

Western Asset Non-U.S. Opportunity Bond Portfolio

(WAFIX)

and

Northern Global Fixed Income Fund

(NOIFX)

.

One international bond fund anticipated the trouble in Greece and positioned its portfolio to benefit from a potential default in the country's debt. The

Eaton Vance International Income Fund

(EAIIX) - Get Report

uses sovereign credit default swaps to create short positions effectively equal to 4.6% of total assets. The fund also bets against the Philippines, Turkey, Malaysia, Thailand, South Africa and Lebanon.

The Eaton Vance International Income Fund favors bond holdings of Germany, France, the Czech Republic, the Netherlands and Belgium. While the fund made the right call on Greece, the extensive use of derivatives, subject to speculative trading, substantially increases risks.

For the best rated bond mutual funds, check out our

Top Mutual Funds

page.

-- Reported by Kevin Baker in Jupiter, Fla.

Kevin Baker became the senior financial analyst for TheStreet Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.