Investing in bonds is challenging now. Interest rates are low, so bonds pay scant yields. Moreover, interest rates may rise in the future, from today’s low levels, and bond prices fall when interest rates rise.
If you have some tolerance for risk, consider an allocation to an emerging markets bond fund. Reasons:
* Past performance has been excellent. Over the past 10 years, the average fund in this category has returned over 10% per year. Most bond funds have returned around 5% a year.
* Yields are attractive. You can earn 5%-6% now with many emerging markets bond funds.
* Comparative advantages. Fiscal problems in the U.S. and Europe may drive down the value of the dollar and the euro. Funds holding bonds denominated in other currencies may gain ground.
Still, investing in bonds from Brazil or Mexico or Russia can be risky. Therefore, you wouldn’t want to overload on such bonds. Nevertheless, a modest allocation to a top-performing fund such as Fidelity New Markets income or MFS Emerging Markets Debt might be worthwhile.