From the September 2005 issue of Investment Advisor • Subscribe!

The Global Itch?

With the Federal Reserve continuing to raise short-term interest rates, while longer-term rates inexplicably remain low (Alan Greenspan's "conundrum"), some fixed-income investors are seeking alternative vehicles, including global bond funds. Foreign bonds continue to benefit from benign inflation, relatively low local interest rates, and tame global economic growth. Indeed, the Lehman Global Aggregate Bond Index gained 6.7% for the year ended July 30, versus a 4.8% rise for The Lehman Aggregate Bond Index.

Global bond funds are generally composed of securities issued by foreign governments or corporations, as well as U.S. bonds. According to London-based Inter-national Financial Services, the size of the global bond market has doubled to about $58 trillion during the past decade.

Foreign bonds are harder to evaluate than U.S. bonds, yet pose similar risks: interest rate levels, credit market conditions, and actual and expected inflation, among others. Foreign debt, however, may be subject to more political instability than U.S. securities. Currency risk presents the greatest concern--fluctuations can increase or decrease the bond's dollar value and return.

Among the best performers in this sector, the $623 million Pioneer Global High Yield Fund currently holds 189 securities. As of June 30, 2005, manager Kenneth J. Taubes had 57.5% of his assets in U.S. high-yield corporate bonds and 29.4% in emerging markets debt. The fund boasts an average coupon of 8.83% (versus the peers' 5.11%) and a low turnover rate, just 50%, compared to 138% for the average global bond fund.

Another top performer, the $3.1-billion Oppenheimer International Bond Fund/A (OIBAX), currently holds 349 debt instruments. As of March 31, 2005, manager Arthur P. Steinmetz had nearly 80% of his assets invested in emerging markets debt. The exposure to emerging markets debt as well as high-yield investments largely accounted for the fund's outstanding returns.--Angelina Dance

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