When the U.S. dollar declines against other currencies, the interest on bonds denominated in those currencies gains in value when converted back into dollars. Although it’s recovered somewhat after last year’s worst annual showing in nearly a decade and a half, the greenback’s relative weakness may leave many investors wondering whether a buying opportunity for international bonds persists.
“Not necessarily,” says Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. “A weak dollar is often viewed as a buy sign for international bonds, but there are other factors that can influence a bond’s value.”
Indeed, the economic and interest-rate policy in a bond’s home country can have a much greater impact on yields, Kathy says. “Having some exposure to a variety of economies is great from a diversification perspective, but too much exposure can add undue risk to your portfolio.”
Instead, investors searching for higher yields may want to look closer to home. U.S. Treasury yields, for example, have been on the rise thanks to a series of Federal Reserve interest-rate hikes, allowing investors to add income to their portfolios without the added risk of investing overseas.
“Treasuries are finally starting to offer competitive yields,” Kathy says, “even when you factor in the positive exchange rates on international coupons resulting from a declining dollar.”
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