1) Currency diversification — I don’t have a good feeling about the long-term prospects of the U.S. dollar. To be honest, the entire fiscal approach of the people here and the government completely suck. Having a lot of domestic bonds for income doesn’t help much if the interest is worth less and less every payout. So I’d rather have money being paid in dollars and euros and yen and rmb and so on. Combine it together into one big melting pot so I take my income in global dollars.

2) More uncorrelated classes lead to more stable returns. Just because the bond market is already more stable than stocks doesn’t mean I can’t aim for even better. I’m sure sometimes emerging bond markets will perform badly. And sometimes intl developed bond markets will crap out. And sometimes the U.S. bond markets will be unpredictable. But combine it together and I should get an even less volatile bond market than any one region. The exact conditions of any of the markets, I only have a passing interest in as I’m just slowly adding to all regions over the next few years as I continually invest money.

Now, I certainly want much lower expense international options. But I’m not interested in waiting around so paying 1% ER now means instead of jumping directly into my desired 50-35-15 split, I start off slow at 80-15-5 or 90-7-3 where I get a bit of volatility reduction w/o totally killing the yields after expenses.

Does anyone think that high yield emerging market (EMG) bonds give stability or lowered risk? The yield spread between US Treasury securities and EMG bonds is at its lowest in years. Does anyone believe that the trend will continue to the point that EMG debt has a lower yield than Treasuries? Right now, the risk premium on EMG debt is at its lowest in years. Is the risk lower?

Market-timers may be attracted by strong recent returns in EMG debt issues, but those returns have been enjoyed already. Let’s not forget that it was the tiny risk premiums on EMG debt over Treasuries that lured Long Term Capital Management, causing it to explode in 1998 when yields moved the wrong direction.

A yield of 3.36% with an ER of 1%? So fully 1/3 of the yield will be eaten by expenses? Bonds have posted capital gains due to declining interest rates. This cannot continue forever.

Bonds are for stability. If you need exposure to foreign currencies, do it with equities.

I’m not sure who you’re responding to with the low volatility question. I wrote about adding bonds to decrease the volatility of an all equities portfolio. And certainly any specific country/region bond might be more volatile than another region, combining multiple regions together could decrease volatility if those regions’ bond investments aren’t completely correlated.

RPIBX – International Bonds
PREMX – Emerging Market Bonds

I’m surprised on though how low the yield (3.36%) is for RPIBX. That probably means they’re overweighted in Japan where rates are way lower than the U.S. and Europe.

Dong, the wisdom being pushed a decade ago was index funds are great for large cap but an active manager can find the bargains in midcap and smallcap. And now when we look at performance in retrospect, small cap indexes have outperform active small cap managers by even a greater margin than in the large cap sector. I suspect it’s the same for international — the value of extra knowledge is probably beat every time by expenses turnover market timing.

I also quickly noticed that T Rowe Price was mentioned as not having any international bond funds. This is absolutely not the case. I know because I have some of my portfolio invested in them. The fund symbol is PREMX (emerging markets bond).

PREMX Fund Objective:
The investment seeks to provide high income and capital appreciation. The fund normally invests at least 80% of assets in government or corporate debt securities of emerging markets issuers. The holdings may include the lowest-rated bonds, including those in default. It is nondiversified.

The expense ratio is 1.03%

Calendar Year Total Returns:
1997 16.83%
1998 -23.09%
1999 22.97%
2000 15.20%
2001 9.35%
2002 9.52%
2003 26.05%
2004 14.83%
2005 17.26%
2006 11.43%

Although I understand where Dong is coming from in terms of his comment about bonds, I would ask that he reconsider as some of them can still have very strong returns (see above) and also provide some “zig” when the market “zags” to reduce your volatility / equity exposure.