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.