Monday, December 12, 2011

USA Today: As Bernanke Punishes American Savers, the Search for Yield Overseas Shows Pitfalls

This is an interesting piece by John Waggoner of USA Today, especially on a personal level, as I've been looking at a host of yield producing products to 'barbell' against an equity exposure.  With the war on savers that Bernanke has waged - and will continue to wage for many years ahead [Mar 31, 2010: Bernanke Content to Sacrifice American Savers to Recapitalize Banks and Benefit Debtors] the choices all come fraught with risk, which many people have learned the hard way of late.  While it's one thing to have avoided European debt for all the obvious reasons, even what was considered 'safe' like Australian debt has been punishing for American investors.

  • ....taking on extra risk for a higher yield really can be a mistake. Today's case in point: international bond funds.
  • If you depend on interest income for your retirement, you have an enormous problem. The average money fund yields 0.02%, which wouldn't buy dust at a thrift store.  To get more interest, you either have to lock up your money or take the risk of losing part of your principal. But even locking up your cash for longer isn't much help. A 10-year Treasury note now yields about 2% — less than the current inflation rate of 3.5%.
  • Because rates are so low, income investors have had to take the risk of losing principal. Rates are higher in some places overseas, so mutual funds that invest in international bonds seemed to be a reasonable bet.
  • The funds, currently yielding about 3%, have been red-hot sellers the 12 months ended Oct. 31, according to Lipper:
  1. Global income funds, which invest in U.S. and international bonds, pulled in an estimated net $23.9 billion.
  2. Emerging-markets debt funds attracted an estimated $15.2 billion.
  3. International income funds saw $4 billion in new money come in the door.
  • Unfortunately, one area that offered particularly tempting yields was Europe. As the European crisis unfolded, traders dumped their bonds like they were a reality show groom. Prices of European bonds got clobbered, as did many of the funds that invest in them.
  • The past three months through Friday, international income funds fell 3.8%. For people used to watching the stock market, that's not a tremendous loss. For conservative income investors, however, any loss is bad news. And some funds fared far worse than average:
  1. WisdomTree Australian and New Zealand Debt fund, down 16.1% the past three months, including reinvested interest.
  2. Forward Emerging Markets debt, down 8.7%.
  3. Templeton Global Bond, down 5.9%.

  • Normally, rising interest rates are the main factor in bond returns: When rates rise, bond prices fall, and vice versa. But European bonds have been hit by worries that they will default — known as credit risk.
  • Another problem is currency risk. Mutual fund shares are priced in dollars. When foreign currencies fall in value, U.S. investors lose money. 

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