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Emerging-Market Bonds: Still a Good Bet?

Emerging-market countries are taking advantage of record-low interest rates by issuing more bonds — and investors are gobbling them up. But are they already too late to the game?

Developing countries sold $11.3 billion in bonds in the first two weeks of the year, more than double the emerging-market bonds issued in all of January in 2011, the Wall Street Journal reported today. But with yields on many of these bonds hitting new lows, some investing pros are questioning whether investors are getting compensated enough for taking the extra risk. In the Philippines, for example, yields on 25-year bonds hit a record-low 5% last week. Indonesia sold 30-year bonds at a record low of 5.375%. “The premium you used to get in those bonds isn’t as much anymore,” says David Falkof, mutual fund analyst for Morningstar.

As emerging-market bonds have become more mainstream — they drew in $12.5 billion in 2011, five times the amount in 2009 — many regular investors and advisers are viewing them as less risky, says Falkof. Some investors even view emerging-market bonds as safer bets when compared to bonds issued by developed countries, experts say, arguing that emerging-market countries carry less debt and have stronger economic growth than other regions like the U.S. and Europe.

Other advisers, however, point out that the bonds still carry plenty of risks. Growth in many of these countries, such as China, is slowing, says David Moore, chief investment officer at Gibraltar Private Bank & Trust, a wealth management firm in Coral Gables, Fla. And the bonds that offer more attractive yields — such as emerging-market corporate bonds or those issued by frontier countries like Qatar and Lebanon — are often less liquid and come with more credit risk, says Falkof.

To be sure, some investors prefer the lower-yielding emerging-market bonds to Treasury bonds, which saw 10-year bonds auction below 2% for the first time ever this week. And investors could still get compensated in the long run; after all, each drop in bond yields is accompanied by an increase in bond prices, which benefits current investors, says Moore.

Before piling in, investors should be sure be aware of the risks, says Falkof. Emerging-market bonds issued in local currencies can help investors diversify away from the dollar, but the bonds can lose value in dollar terms if the greenback strengthens. In 2011, local currency emerging-market bond funds lost 3%, while those denominated in the dollar, euro and the yen gained 5%, according to Morningstar. Overall, the funds gained 2.6% over the last year.


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    • Ever since 1999
      Equally Invested

      You want to have More? Just have to SAVE MORE, not Gamble More.

    • Well, Looks like the same o, same o.. Don’t go sticking your neck out and commit either way..
      1. Everyone is chasing Performance and Chasing Ylds
      2. So what does that tell you?
      3. The fed is apparently being “influenced” by Wall Street and the Real Estate Industry NOT to raise Rates, expeically Not before His Boss, Pres. Obama and The Dems. , Gets ReElected
      4. While Savers can’t get a break and get a Decent 5% on their CD’s and are being pushed really hard to put their $ into Wall Street..
      5. So they can steal the rest of what they couldn’t get in 08′ and early 09′.

      But Lo and Behold? Notice how American Domestic Bonds did so Well Last yr? Gee, I wonder why?

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