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Posted by Shhhh on February 21, 2008, 5:35 am
In this environment of lowering interest rates does it make sense to
park cash in an international bond fund?
I have roughly $4000 a month I need to save for the next year. so I'm
wondering if it makes sense to invest in an international bond mutual
fund, and earn more than a plain jane savings account.. I want to earn
more than 3% interest, because by the end of the year, in a savings
account it'll be much less than that.
So I'm looking at International bond funds like TRowe Price's
offerings. They have 2, and international bond fund, and an emerging
market bond fund (which offers significantly more yield than any us
savings account)
What do you folks think? Is this a good idea? Am Icorrect in stating
that lowering interest rates causes bonds to increase correct?
Thank you
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Posted by John A. Weeks III on February 22, 2008, 6:58 pm
In article
> What do you folks think? Is this a good idea? Am Icorrect in stating
> that lowering interest rates causes bonds to increase correct?
Also, increasing yields typically mean an increase in risk. How
much of your investment are you willing to lose? 5%? 1/3? And
do you really need it in the one year timeframe? What the dollar
makes a huge run just after the new President takes office and
your international bond fund tanks?
-john-
--
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John A. Weeks III 612-720-2854 john@johnweeks.com
Newave Communications http://www.johnweeks.com
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Posted by Elle on February 22, 2008, 7:26 pm
> Am I correct in stating
> that lowering interest rates causes bonds to increase
> correct?
For investment grade bond funds and in general, yes. For
international and emerging market bond funds, no. When you
go overseas with bonds, then generally you are taking on
much more risk and volatility.
You need to decide if this move alters your asset allocation
plan so much that it is undesirable. Going from low risk to
high risk will not be a free lunch. You have to be prepared
for more swings, both in yield and principal, when you
switch from cash to overseas bonds.
A chart that introduces one to this reality, from the late
1980s to the present:
http://finance.yahoo.com/q/bc?t=my&s=RPIBX&l=on&z=m&q=l&c=vbmfx
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Posted by Tad Borek on February 22, 2008, 8:02 pm
Shhhh wrote:
> In this environment of lowering interest rates does it make sense to
> park cash in an international bond fund?
>
> I have roughly $4000 a month I need to save for the next year. so I'm
> wondering if it makes sense to invest in an international bond mutual
> fund, and earn more than a plain jane savings account.. I want to earn
> more than 3% interest, because by the end of the year, in a savings
> account it'll be much less than that.
Unless the funds you're looking at hedge currency risk, that type of
fund adds another layer of risk -- you're at the mercy of variations in
the value of the US dollar. Recently this risk helped the performance of
(unhedged) Int'l bond funds because the dollar has fallen:
http://research.stlouisfed.org/fred2/series/TWEXB
The falling dollar boosted the returns of bonds denominated in foreign
currencies, for a US investor. The opposite happens when the dollar
gains in value, so you could see losses larger than the interest earned
during the year and most people don't want that for 1-year investment.
The other issue, assuming you're buying high-grade bond funds (not junk
or emerging-market debt) is the term of the bonds. Bonds of longer
maturities are subject to potentially large price changes when interest
rates change. For one-year money, where your goal is simply to do better
than a savings account, the closest match would be a currency-hedged
international bond fund with very short maturities (one year or less). I
know of an institutional fund managed that way but it's kind of unusual.
Realistically, you're not missing much - this type of fund should not do
much better than a comparable dollar-denominated investment.
Because you're not investing a lump $48,000 now, but rather $4k over 12
months, any additional yield will have a relatively small impact on the
value at the end of the pipe. If you really need all the money in a
year, is it worth the downside risk?
-Tad
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Posted by jIM on February 24, 2008, 7:45 am
>
> Because you're not investing a lump $48,000 now, but rather $4k over 12
> months, any additional yield will have a relatively small impact on the
> value at the end of the pipe. If you really need all the money in a
> year, is it worth the downside risk?
>
something along these lines to consider, depending on what you want
the 48k for, and when in 2009 you need this money-
Each month open a 12 month CD of 4k. Each month in 2009 you will have
a CD maturing. When you open each CD you will lock in rates available
for that month.
Maybe it makes sense to open 7 month or 13 month CDs instead, or in
Feb open a 13 month, March open a 12 month, April open an 11 month...
so all 12 CDs mature the same month.
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