Points to Consider When Picking a Non-U.S. Bond Mutual Fund

Returns on global bond mutual funds have beaten those of most U.S. bond funds the last five years, as foreign interest rates have remained high and the dollar has tumbled.

Most major brokerages, as well as major mutual fund firms including Fidelity, T. Rowe Price, Templeton and Scudder Funds, offer global funds. Some tips if you’re shopping around:

* Short versus long. As with U.S. bond funds, you can choose foreign funds that own shorter-term bonds (typically under three years in maturity) or those that own longer-term bonds. The average shorter-term foreign fund actually yields more than its long-term counterpart today (7.8% versus 7.2%), because short-term interest rates are abnormally high overseas, especially in Europe.

However, if you expect foreign rates to come down and/or the dollar to weaken, long-term foreign funds offer much greater potential for capital gains than short-term funds.

* Hedge or no hedge. Some foreign bond funds hedge their bets on the dollar by using currency futures and options. Hedging is a form of insurance that softens the blow to a fund’s share value if the dollar suddenly soars, cheapening foreign securities.

But as with other forms of insurance, hedging costs money, and therefore lowers the yield on a fund. So some funds don’t hedge.

Before you buy, learn the fund’s hedging strategy, and what that could mean for your share price should the dollar rise or fall sharply this year.

Comparing Bond Fund Returns

Global bond funds, which typically invest in bonds of foreign governments, have scored the best investment returns of four key bond fund categories over the past five years.

Long-Term Bonds

Fund category 5 years* 1 year* 1992* yield Global +56.8% +11.0% -1.9% 7.2% U.S. corporate +48.1% +11.6% -1.1% 6.9% U.S. government +44.6% +10.1% -1.4% 6.5% U.S. municipal +40.6% +9.8% +1.1% 5.8%

Short-Term Bonds

Fund category 5 years* 1 year* 1992* yield Global +46.6% +6.2% +1.9% 7.8% U.S. government +44.6% +8.8% +0.3% 5.8% U.S. corporate +45.2% +9.4% +0.7% 5.8% U.S. municipal +32.7% +6.9% +1.4% 4.7%

* Data through March 31 except 1992 data (through April 30). Corporate categories are for high-quality issues; municipal categories are for general muni funds.

Source: Lipper Analytical Services