Global Bond Funds Add Diversity, Cut Risk

When great swaths of investments go bad in the most stunning, unthinkable ways -- money-market funds that break the buck and Wall Street investment banks that just disappear -- we re-learn the lesson that bonds, especially U.S. Treasurys, are a critical piece of a wisely diversified portfolio. As an asset class they may lag stocks in total return over the long haul, but when everything is going to hell you can't beat an I.O.U. from Uncle Sam, putatively the safest investment there is. True, his interest payments won't make you rich, but you know he's good for the loan.

The bad news is that the market's mad flight to the safety of Treasurys looks like the last days of Saigon, with yields barely hanging on to the helicopter skids. Factor in inflation and even Treasury Inflation Protected Securities, known as TIPS for short, can generate negative returns.

Fortunately, plenty of other stable governments in the big economies of the developed world want to borrow your money, too. In many cases they beat Treasury yields by a good margin (see chart below.) For example, Australia, bolstered by 7% short-term rates and fat trade surpluses fueled by exports of raw materials, tops the charts with 10-year coupons and yields well above 5%.

In most cases investors can't go and buy these issues individually. It's unlikely that your online broker offers 10-year Belgian bonds, but that's just as well. Interest-rate risk and currency risk in the home countries are just a couple of variables that make these investments complicated.

The good news is there are some low-cost global government bond funds that will do the job for you. T. Rowe Price International Bond (RPIBX), for example, is a no-load fund requiring a $2,500 initial investment with an expense ratio of less than 1%, according to Morningstar. The trailing 12-month yield of more than 3.9% is fairly attractive in this dismal market, though that's somewhat offset by a total return that's dipped 0.15% over the same span.

American Century International Bond (BEGBX) is another is no-load fund with a $2,500 initial-investment requirement and a sub-1% expense ratio. The trailing 12-month yield comes in at 5.9% and total return is nearly 1%. Then there's PIMCO Foreign Bond (USD-Hedged) D (PFODX), a no-load, sub-1% total-expense fund with a $5,000 minimum. It's yielded 3.6% in the last year, though total return has slipped 0.6%.

We've been banging on quite a bit lately about safe havens for your cash. Decent yields and credit-worthy lenders earn international government bonds a place in a fixed-income portfolio, too. We're not knocking Uncle Sam, but in times like these you need all the defense -- and low-risk yield -- you can get.