Foreign bonds can form an important portion of an investor’s diversified portfolio since they exhibit such low correlations with both U.S. stocks and U.S. bonds. Debt securities flourished last year, buoyed by an expanding global economy, rising liquidity, the increased integration of emerging markets economies into international financial markets, and the cessation of the Federal Reserve’s two-year interest rate hike campaign. In this environment, U.S. high-yield bonds and emerging markets debt securities tended to outperform other global fixed-income asset classes, particularly in the second half of 2006.

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The top performing mutual fund in this sector, the $1.35 billion Pioneer Global High Yield Fund (PGHYX), invests in below-investment-grade (high-yield) debt securities from all around the world, including emerging markets. Using a value-oriented approach, portfolio manager Andrew Feltus invests in what are believed to be the 50 to 70 best global companies issuing high-yield debt.

As of the end of last year, Feltus had 55.1% of the fund’s assets in U.S. high-yield corporate bonds, 30.7% in emerging markets debt securities, and 9.9% in international high-yield securities. Also as of that date, the fund featured an average credit quality of B-, average maturity of 8.14 years, and duration of 4.22 years.

A strong long-term performer in this asset class, the $6 billion Oppenheimer International Bond Fund (OIBAX), invests primarily in corporate and government bonds of the U.S. and foreign countries, including both developed and emerging markets.

As of September 30, 2006, fund manager Arthur P. Steinmetz had assets spread out over more than 40 nations, although securities issued by the U.S. and Canada (36.2%) dominated the portfolio. The fund also maintained significant exposures to Italy (6.9%), Brazil (6.3%), France (5.1%), and Germany (5.0%).

As of December 31, 2006, the Oppenheimer portfolio sported an average credit quality of A, and duration of 5.6 years.

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