Foreign Bonds

Imagine two cars on opposite ends of a roller coaster, and you'll get the picture on the sudden divergence between U.S. interest rates and rates in most other countries. U.S. rates are climbing as investors focus on our economy's strength. But in Europe, Japan and Latin America, rates remain on a downward slope because economic weakness still is the rule abroad. On Thursday, we saw new supporting evidence for both trends. Yields on 30-year U.S. Treasury bonds jumped to 6.

Bond guru Bill Gross hasn't been shy about saying that he sees no value in U.S. Treasury bonds at current interest rates. Now, he has jettisoned the last of those holdings from his $237-billion Pimco Total Return fund, the world's biggest bond fund. The portfolio, managed by Pacific Investment Management Co. in Newport Beach, cut its U.S. government-bond holdings to zero in February from 12% of assets at the end in January, according to Pimco data. The U.S. government-related category as defined by Pimco can include conventional Treasury bonds, securities of other government agencies, Treasury inflation-protected bonds and interest-rate swaps.

Investors who want to play the falling dollar are finding that foreign bonds are the way to go: Not only do the bonds appreciate in value as the dollar sinks, but the yields they pay are far above U.S. interest rates. Yet with the dollar already at all-time lows against the German mark, some experts are warning investors against making oversized bets now on foreign bonds, and in particular European bonds.

Ecuador announced Monday that it would miss a payment due this week on $2.6 billion in bonds but surprised international investors with a promise to pay sometime over the next month. President Rafael Correa took office last month after a campaign in which he threatened to default on some or all of the country's $10.2 billion in foreign debt. Correa said he considered the debt illegal. Ecuador has defaulted on foreign bonds three times since the early 1980s.

You've noticed how interest rates have risen in Europe and Japan amid the euphoria of the opening of the East Bloc. You figure that overseas bond yields must look attractive. What can you do to capitalize? If you're willing to take some risk, you might consider mutual funds investing in foreign bonds. International bond funds invest in bonds issued by governments of such countries as Japan, West Germany and Britain. Global funds also invest in U.S. bonds.

Bond yields of 10% to 15% in many foreign countries are a continuing lure for American investors, who figure those yields handily beat 7% returns on U.S. Treasury bonds. But last week, a big U.S.-based fund that invests in foreign bonds omitted its fourth-quarter dividend--angering and confusing shareholders. The fund, the New York-based Global Yield Fund, is a "closed-end" mutual fund: It has a fixed number of shares outstanding, and they trade on the New York Stock Exchange.

Most savvy U.S. investors would be justifiably suspicious if someone offered them a 9% or 10% yield on a short-term government bond. After all, short-term U.S. treasuries are paying less than half that now. Still, such yields truly are available on government bonds. The catch is that the bonds aren't issued by the U.S. government. Germany, France, Sweden and the United Kingdom are all paying upwards of 9% on short-term obligations.

Other than gold-mining stocks, the best investment ideas so far this year have been foreign bonds and foreign stocks. And many pros now believe that the foreign play has greater staying power than the gold play. The reason is simply that interest rates are continuing to fall in much of the world, and in many countries the rate decline has a ways to go before it catches up with the slide in U.S. yields last year.

Big Japanese investors slashed their holdings of foreign bonds in 1990 to the lowest level in six years because of higher domestic interest rates and the stronger yen. The trend could have repercussions for the United States, because the diminished Japanese appetite for foreign bonds threatens to curtail what has been a crucial source of financing for Washington.

Ecuador announced Monday that it would miss a payment due this week on $2.6 billion in bonds but surprised international investors with a promise to pay sometime over the next month. President Rafael Correa took office last month after a campaign in which he threatened to default on some or all of the country's $10.2 billion in foreign debt. Correa said he considered the debt illegal. Ecuador has defaulted on foreign bonds three times since the early 1980s.

Individual investors continued to pour money into stock mutual funds in February, but their appetite for foreign funds waned somewhat. Stock funds overall took in $27.3 billion in net new cash in February, down from $31.6 billion in January but up from $22.2 billion in February 2005, the Investment Company Institute said Thursday. Foreign stock funds took in a net $19 billion for the month, down from a record $23.5 billion in January. Domestic stock funds took in $8.

American investors' love affair with foreign stock mutual funds shows no sign of waning. Investors continued to pour cash into foreign stock funds in December, while domestic equity funds saw net outflows, new data show. The total net cash flow into all stock funds was $10.1 billion last month, down from $21 billion in November, Investment Company Institute, the fund industry's trade group, reported Monday. Cash flow is new purchases minus redemptions.

Ecuador's looming default on $6 billion in foreign debt has so far been shrugged off by neighboring Latin American markets. Unlike the faraway crises in Asia and Russia that caused havoc in Latin America, the placid reaction to Ecuador's likely default shows that investors have become more sophisticated about emerging markets, said Lacey Gallagher, Latin American ratings director at Standard & Poor's. "In and of itself, Ecuador's crisis is not a watershed of any kind," Gallagher said.

Chase Manhattan Corp. said it lost $160 million before taxes from trading in emerging markets in October and as a result may fail to achieve its targeted 15% annual earnings growth. The losses stem from declines in the value of Brady bonds and Eurobonds the bank held or sold, but were less severe than some analysts suggested before the disclosure. Trading revenue at the largest U.S. bank accounted for $505 million in the third quarter, or 21% of the bank's non-interest revenue.

Talking about worrisome speculation and sky-high valuations in the U.S. stock market is old hat by now, so as Bob Dole would say, "Let's just don't do it." Instead, let's talk about worrisome speculation and sky-high valuations in the world bond market. On Tuesday, long-term U.S. Treasury bond yields fell again to fresh seven-month lows, which traders attributed to growing belief in a moderating economy and confidence that the election would maintain the status quo in Washington. But the U.S.

Other than gold-mining stocks, the best investment ideas so far this year have been foreign bonds and foreign stocks. And many pros now believe that the foreign play has greater staying power than the gold play. The reason is simply that interest rates are continuing to fall in much of the world, and in many countries the rate decline has a ways to go before it catches up with the slide in U.S. yields last year.

Here's a Scandinavian number that might warm your blood: 10% yields in short-term Danish government bonds. While lower interest rates have people in the United States searching hard for higher payouts, several other countries continue to offer rich bond market returns. If you can tolerate risk, the current economic environment might be a good time to venture into foreign bonds. Mutual funds offer a good way to do so, since they're diversified and professionally managed. At the moment, U.S.

The dollar has fluctuated wildly in the 1980s, creating the potential for big gains as well as spectacular losses for hardy souls willing to play the foreign currency markets. The dollar soared to heights of more than 270 Japanese yen and 3.3 West German marks earlier this decade, only to drop, erratically, to current levels of around 121.6 yen and 1.7 marks. For people willing to gamble on currency fluctuations, however, the investment choices are limited.

American mutual fund investors, most of whom have few if any foreign bond holdings, now have a good opportunity to get into or add to those positions. Global money managers say the sharp rise in interest rates--a surge precipitated by rising U.S. interest rates as much as anything--have made European bonds attractive. European yields have risen more than U.S.

Imagine two cars on opposite ends of a roller coaster, and you'll get the picture on the sudden divergence between U.S. interest rates and rates in most other countries. U.S. rates are climbing as investors focus on our economy's strength. But in Europe, Japan and Latin America, rates remain on a downward slope because economic weakness still is the rule abroad. On Thursday, we saw new supporting evidence for both trends. Yields on 30-year U.S. Treasury bonds jumped to 6.