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Thread: Investing in high grade non-US dollar denominated foreign government bonds?

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    Default Investing in high grade non-US dollar denominated foreign government bonds?

    I've been reading about investing in high grade non-US dollar denominated foreign government bonds as one of the ways to take advantage of a falling dollar. It appears the American Century International Bond Fund and T. Rowe Price International Bond would be among the funds worth considering. I've checked the American Century International Bond Fund website, and they say you can invest into their fund only if you have opened an account with them on or before September 28, 2007. Otherwise, you have to buy into the fund through an investment specialist. Why would they not allow new customers open an account with them?

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    Default Re: Investing in high grade non-US dollar denominated foreign government bonds?

    Why would they not allow new customers open an account with them?
    they typical reason is that the desireable characteristics of the fund's holdings i.e. actual buy-in price of the foreign bonds in US dollars, actual interest rate paid when converted back to US dollars etc. cannot be duplicated on today's market. Thus if the fund is forced to go looking for 'second best' investments in order to accept new money from additional investors, it will water down the performance of the fund for initial investors. This is referred to as being 'closed end'. With a 'closed end' fund about the only way a new investor can acquire shares is if an existing fund investor wants to cash out, thus the need for an 'investment specialist' to connect the two.

    I would point out that you can bypass the 'fund' aspect and directly purchase foreign bonds through any full service broker. One of the more popular ones is the German Bund, which you can buy into for about a $6000 minimum at the moment.

    In fairness, I also need to point out that owning foreign bonds, or owning a piece of a fund that owns foreign bonds, exposes you to not one but two downside risks. The first is exchange rate risk on a further decline of the US dollar vs a turnaround. The second is interest rate risk on further cuts in the US Fed funds rate vs a turnaround. When both of these are moving in your favor the rate of return on fureign bonds can be excellent. However if either turns the wrong way the rate of return could be disappointing. And if both turn the wrong way you could lose a significant amount of money in a hurry.



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    Last edited by Melonie; 10-03-2007 at 06:32 PM.

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    Default Re: Investing in high grade non-US dollar denominated foreign government bonds?

    Is it because the dollar has declined so much that it can't buy anything?

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    Default Re: Investing in high grade non-US dollar denominated foreign government bonds?

    ^^^ well the US dollar's decline in exchange rate is the reason that ANY investments denominated in Euros have risen in value from the viewpoint of US investors. That's one half of the equation. However, after a big jump, the US dollar vs Euro exchange rate has actually turned around a bit in the last couple of days.

    The other half of the equation is the 'interest rate spread' between the rates paid on foreign bonds vs the rates paid on US bonds. The US Fed's recent 1/2% rate cut increased this spread which favored foreign bonds a bit. However, further action by either the US Fed or the European Central Bank could affect the spread from either end, and with it the 'principal value' of the bond.

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