Investing in Foreign Bonds Hedges Against Falling Dollar

It’s a well known fact that most Americans invest their money in American-based companies and securities rather than looking to do so abroad.  In part, this is due to a lack of knowledge about how to go about doing so and what the risk/rewards are. The purpose of this writing is to bring about awareness to a strategy being used successfully by many US investors (but not nearly enough). This type of investing can act as a nice insurance policy against the falling value of the US dollar and provide a quality return-on-investment with very little risk. 

In buying foreign bonds, you are investing in a safe but predictable investment vehicle designed to protect your principal by minimizing market risk exposures which are prevalent in most international economies. For most US investor amateurs, this is a practice they use in their own portfolios but only with domestic bonds. This practice of “hedging” with bonds is just another way to have some of your money invested safely in case of catastrophe to the equity markets. The only real risk to these types of investments is that as the dollar strengthens against the foreign exchange rate, the net return on these foreign returns gets proportionately diminished.

In order to be able to jump into foreign bond investing, you will need to either do your research and set up investment accounts in the foreign countries with which you choose to invest, or contact a broker dealer and consult with an agent who has experience in that area. They can certainly get you started in the right direction by identifying which bonds are paying the best yields and over the most favorable time periods.

One specific example I can point to right now is the consistently strong Australian Dollar in the form of Australian Bonds which is paying a very safe 6+ percent yield and was recently as high a 7.5%.   Note that these are rates you can lock in for a little as two years. Now I am not saying to dump all your money into Australian bonds, just that you may want to have a real good sit down with you advisor about making foreign bonds one component of a building a balanced investing portfolio. 

So what are you thoughts? Do you use foreign bonds or other external investments to derisively your investment allocations? What future do you see for the relative strength of the dollar over the next two years and beyond?