There's been explosive growth in international bond funds, as Americans quickly exit from low-yield bank certificates of deposit and money-market funds.
Seeking to capture double-digit returns, investors have placed more than $30 billion in these diversified funds that view the world as their investment oyster. About $22 billion of that is in short-term funds holding bonds with maturities of three years or less. They offer an easy transition from CDs and money-market funds, with the best-performing fund turning out a 13.33 percent total return over the past 12 months.
Longer-term funds with bonds of seven years or longer are more volatile. However, for those who braved the risk, the best-performing fund gained 28.38 percent. These funds stick with high-quality government and corporate bonds and try to reduce currency risk through hedging techniques. There's ever-present interest-rate risk as well.
Consider bond returns of other nations, some nearly double those of the United States. In 10-year bonds, yields in Italy are currently 13.28 percent, Spain 11.75 percent, Sweden 9.73 percent, Denmark 9.11 percent, the United Kingdom 9.04 percent, Australia 9 percent, Ireland 8.97 percent, France 8.85 percent and Germany 7.97 percent. Overseas short-term rates are also higher than those available in this country.
"A lot of our success has to do with weakness of the U.S. dollar the past 12 months," explained Mark Turner, who heads the international bond division at Scudder Stevens and Clark, which has the top-performing short-term and long-term bond funds.
Best-performing short-term international bond funds in total return (yield plus price appreciation) over the past 12 months, according to the Morningstar Inc. fund-tracking firm, were:
Scudder Short Term Global Income, New York; $884 million in assets; no load (no initial sales charge); $1,000 minimum; up 13.33 percent.
Van Kampen Merritt Short Term Global Income "A," Lisle, Ill.; $219 million in assets; 3 percent load; $1,000 minimum; up 11.25 percent.
Prudential Short Term Global Income "A," New York; $119 million in assets; 3 percent load; $1,000 minimum; up 8.97 percent.
PaineWebber Short Term Global Income "A," New York; $361 million in assets; 3 percent load; $1,000 minimum; up 7.98 percent.
"The economies of Europe have been very weak and have been helped by the Bundesbank, which has kept short-term rates high," said Keith Gardener, who tracks international markets for T. Rowe Price. "Because other countries are pegging their currency to the Bundesbank, they haven't been able to lower their interest rates either."
Best-performing funds over the past 12 months in total return among those that include longer-term international bonds were:
Scudder International Bond Fund, New York; $578 million in assets; no load; $1,000 minimum initial investment; up 28.38 percent.
Fidelity Deutsche Mark Performance Portfolio, L.P., Boston; $24.5 million in assets; sales charge of .40 percent; $5,000 minimum; up 28.35 percent.
Fidelity Sterling Performance Portfolio, L.P., Boston; $11.6 million in assets; sales charge of .40 percent; $5,000 minimum; up 27.83 percent.
Loomis Sayles Global Bond Fund, New York; $5.8 million in assets; no load; $1,000 minimum; up 25.99 percent.
"Investors are under-represented in international bonds, and funds offer a terrific opportunity for access to these markets," said Don Phillips, publisher of the Morningstar Inc. publications.
"Interest rates around the world, while related to some extent, remain a function of individual economies."