Want to Make Money in Bonds? Look Overseas!

Making money in bonds when the dollar is tanking … when deficit spending is surging … when interest rates are rocketing … and when the U.S. government’s AAA credit rating is openly being questioned … sounds darn near impossible.

And it is if you spend all your time focused on U.S. bonds.

But this unique combination of forces also opens up specific profit opportunities in one corner of the bond market — FOREIGN debt.

In fact, one of my favorite foreign bond mutual funds has gained more than 4.5 percent in the past month. Compare that to something like the iShares Barclays 20+ Year Treasury Bond Fund (TLT), which has plunged 22 percent in 2009 alone!

What gives? How can certain foreign bonds and foreign bond funds do well even as U.S. bond prices tank?

A Bond Market Strategy
That Works — Even Now!

The simplest way to make money in this environment is to “short” long-term bonds. Just like with shorting stocks, you’re betting that you can borrow and sell bonds now, wait for their prices to fall, and then buy them back for a rock-bottom price. The difference is your profit.

If you had done so back when I said the Treasury bubble was about to burst in December, you’d have made a pretty penny. In fact, in one of our services, Martin and I have been recommending an investment that shorts the bonds for you. Subscribers are racking up double-digit gains as a result!

But shorting bonds isn’t the only way to profit. You can also buy individual foreign bonds or mutual funds that invest in overseas bond markets …

A falling dollar can be good news if you’re holding foreign bonds.

You see, when the dollar declines in value against the British pound, the euro, the Japanese yen, or other foreign currencies, that’s good news if you’re a U.S.-based investor in foreign bonds. Because every unit of foreign currency you receive when you collect interest or sell the bonds translates into more dollars when you repatriate the money.

In simple terms, a falling dollar juices your foreign bond returns.

However, rising interest rates and falling long-term bond prices in whatever foreign market you’re targeting can offset those gains. So you have to make sure you invest in SHORT-TERM foreign bills and notes — debts with maturities of, say, two years or less.

Ideally, you also want to avoid as much credit risk as possible. That means sticking to very high-grade corporate debt. Better yet, you can buy sovereign securities from highly-rated governments. We all know that even sovereign bonds entail some risk, especially with countries like the UK facing credit downgrades. But as long as you stick to shorter-term debt, your principal risk is seriously minimized.

How to Get Started …

Morningstar.com has a great mutual fund screening tool if you’re looking to add some foreign bond exposure. Just pick “Taxable Bond” as your Fund Group and “World Bond” as the Morningstar Category. You can sort the funds by returns, expense ratios, and so on.

There are also a couple of exchange-traded funds (ETFs) that invest in foreign debt. But they’re relatively new and not showing much trading volume yet. So I hesitate to even mention them here.

A better way to get onboard? Well, I’m biased, of course. But I’d recommend subscribing to Safe Money Report. Our latest bond market trades are working out nicely. And if we’re right about where long-bonds and foreign bonds are headed, the ride isn’t over.

Until next time,

Mike

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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