How to Lock In 8% Government Yields

By Carla Pasternak

Here's a handy tip:

Yahoo Finance has a page with information on all sorts of bonds rates. The page makes it easy to see where bond yields are right now. Click here to see the list (be sure to save the link so you can check back often).

I bring this up because I want you to take a look at the current yields on Treasury bonds. At the time of this writing, 10-year Treasuries paid a measly 2.5%. I don't know about you, but I'd like higher yields than that.

The thing is, you can't beat the safety of a government bond. That's why the yields are low -- anxious investors are fleeing to safety in a roller coaster market. But what if you could earn considerably more on government bonds -- more than three times more -- without sacrificing much safety?

I found just such an opportunity. There are bonds you can own today that pay triple what similar U.S. Treasuries pay. These bonds are backed by governments and have investment-grade credit ratings. On top of this, the asset class has returned +12% annually for the past 15 years.

I'm talking about emerging market bonds. I'm finding some of the juiciest government yields in the world from emerging markets -- places like Indonesia, Turkey, India and Brazil.

Emerging markets have a reputation as being exceptionally risky, but that isn't always the case. In fact, many emerging markets have investment-grade debt.

Ten-year government bonds from South Africa carry a "BBB+" rating -- putting their credit quality on par in with bonds issued by Dow Chemical Company (NYSE: DOW). Meanwhile, 10-year bonds from India are rated "BBB-" and yield 7.7%. Bonds issued by Indonesia are just below investment grade at "BB" and yielding 8.0%.

Unlike their European counterparts, credit ratings for these emerging markets are getting better, not worse. Ratings for Chile and Turkey were upgraded last month, and Brazil and Indonesia moved up last year. Ratings for many emerging markets have improved so much that more than half of the holdings in JP Morgan's Emerging Market Bond Index are now rated as investment grade.

As you would expect, bonds from emerging markets are handily beating U.S. Treasuries this year. And it's not just a fluke. The fact is that emerging market bonds have been the best performing bond category for the last five years, 10 years and even 15 years, according to Morningstar data. I mentioned above that the group has returned +12% annually in the past 15 years.

So How Do You Invest?
Yields on foreign bonds are enticing, but it's not always easy for the average investor to own them outright. I have a solution.

There are several funds on the market that make accessing a basket of emerging-market bonds as simple as buying a share of stock. But picking the best fund involves much more than just opting for the highest yield.

In addition to looking for a solid yield and a portfolio that matches your risk appetite, it's important to check whether the fund can afford what it pays out. The easiest way to do this is to look where the distributions come from. If payments are identified as "interest" or "ordinary" income, it's usually safe; this is money paid from bond holdings. If payments are labeled as "return of capital," however, that can spell trouble. Return of capital payments can mean the fund had to dip into its cash reserves to maintain a high payment to investors.

Currency is another major consideration when you go global, as exchange rates affect the value of foreign bond funds. Foreign countries issue debt in both U.S. dollars and local currency. Those dollar-denominated bonds are unaffected by currency swings if you're a U.S. investor, but the value of a local currency fund rises or falls when the dollar weakens or strengthens. The currency swings can impact your returns for the better if the dollar falls or for the worse if it strengthens. (Read: The Simple Ways to Profit from a Falling Dollar)

The neutral stance is to invest in foreign bond funds that are not affected by currency swings. PowerShares Emerging Markets Sovereign Debt (NYSE: PCY) is such a fund. It invests 100% of its assets in dollar-denominated foreign government bonds. Moreover, all its monthly payments are considered "ordinary income." You might want to wait for a pullback -- the fund has returned nearly +10% in the past two months. But even at a current high, it yields close to 6.0%.

Try getting that from a Treasury...

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Disclosure: Neither Carla Pasternak nor StreetAuthority, LLC hold positions in any securities mentioned in this article.