The yields on the U.S. government issued bonds have started a
new downtrend after the government shutdown and poor jobs
The thought process on Wall Street is that taper will not
arrive until the first quarter of next year at the earliest.
Without tapering on the table it opens the door for bond
investors to push up prices as yields decline.
The yield on the 10-year Treasury bond is at 2.47 percent, the
lowest in three months.
Investors may be able to play U.S. bond ETFs during the rally,
however the income paid out remains low and the rally will not
last forever. A better option is to look outside the borders of
the U.S. at international bond ETFs.
Both developed and emerging market international bond ETFs are
offering higher yields as well as more upside potential.
Two ETFs to consider are below.
PowerShares Emerging Markets Sovereign Debt ETF (NYSE:
The ETF invests in liquid emerging market U.S.
Dollar-denominated government bonds issued by approximately 22
different countries. The countries that make up the highest
allocations are Romania, Hungary, South Korea, and Poland. The
current yield on the ETF is 4.9 percent and it has lost 10.6
percent of its value in 2013.
Because the bonds are denominated in U.S. Dollars, the
weakness in the greenback this year has weighed on the total
performance of the ETF. Recently the ETF has started to gain
momentum and hit a new four-month high as it rallied over 7
percent from the September low. If the value of the U.S. Dollar
continues to lag it could hold back PCY from further gains in the
iShares Global ex USD High Yield Corporate Bond ETF (NYSE:
The index tracks an index that consists of high yield
corporate bonds with ratings below investment grade. The bonds
are denominated in Euros, British Pounds, or Canadian Dollars.
The goal is to provide exposure to the global high yield
corporate bond universe without exposure to U.S. Dollar.
Therefore, U.S. investors would benefit from a falling greenback
because it will increase the conversion rate from the foreign
The ETF is up 7.3 percent in 2013 and the current yield is
4.35 percent. The ETF bottomed in mid-July as the U.S. Dollar
Index hit a peak. Since that time the ETF has rallied nearly 13
percent. The countries with the highest exposure include France,
Netherlands, and Luxembourg. Nearly 85 percent of the bonds are
denominated in the Euro and the to sector represented is
industrials. The ETF recently closed at a new all-time high as
the U.S. Dollar hit a new multi-year low.
The two ETFs vary dramatically with PCY investing in emerging
markets, government bonds, and denominated in U.S. Dollars. On
the other side is HYXU that invests in developed markets,
corporate bonds, and not denominated in U.S. Dollars. The
performance in 2013 shows the distinct difference in composition.
Both could be owned to the diversity.
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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