During the past five years, no type of bond fund has even come close to emerging markets bond funds, which have posted an annualized return over 15 percent for that period, according to Morningstar. U.S. government bond funds, by comparison, have returned 6.3 percent per year in the last five years, through 2004.
Emerging markets include just about every place except the U.S., Canada, Japan, and Western Europe. Some mutual funds hold bonds issued in the un-developed world, either by governments or by local corporations. As of last report, emerging markets bond funds’ top holdings included issues from Brazil, Russia, Turkey, and Mexico.
Many of these countries have had credit upgrades recently, indicating economic and political progress, Those upgrades have increased bond prices. In addition, investing in these bonds may help to diversify your fixed-income holdings. This can be an extremely risky category so prices can fall sharply. Conversely, higher risks generally lead to higher bond yields (now 6 percent, on average), which is another attractive feature of emerging markets debt.
