Investing abroad at home.

Foreign bonds offer more risk and higher returns

Earn more than 13% on a government bond? That sounds pretty tempting in today's low-yield world, but there is a catch: The government issuing the bond is Jamaica, and U.S. Standard & Poor's rates the bond B, a long way from its top AAA rank, so investors have to bear some risk to receive that 13%-plus payoff.

Welcome to the world of foreign bonds. Savvy investors can earn handsome returns, but only if they know the territory. You can either buy the securities or invest through funds (see chart). To begin, foreign bonds come in two major categories:

Developed nations. Bonds issued in Canada, Europe, Japan, and other countries where financial markets are relatively efficient. Bond yields tend to be comparable to American yields, or lower, reflecting risks familiar to U.S. investors.

Emerging markets. The developing world, from Jamaica to Jordan, also may issue bonds; most emerging markets bonds are issued in Argentina, Brazil, and Mexico. Yields tend to be much higher here because investors run risks ranging from currency collapse to overthrow of the government.

Wherever bonds come from, they fall into either of two classes:

Government bonds. These bonds are backed by the issuing governments and their agencies. These agencies are naturally reluctant to default because lenders, once burned, won't provide more funds. Some are called "Brady bonds" (after Nicholas Brady, former treasury secretary under Presidents Reagan and Bush), which are partially backed by the U.S. government.

Corporate bonds. Foreign companies may issue bonds, just like AT&T and GE. The yields and the credit quality of these bonds vary widely, from company to company.

Why invest in any of these types of foreign bonds? The high yields offered by emerging markets bonds may be appealing. "Some investors feel reassured by bonds issued by sovereign nations, which may be unlikely to default," says Charles de Vaulx, portfolio manager, First Eagle Sogen funds. "Some of the bonds are denominated in U.S. dollars, so there's no currency risk, either."

By currency risk, de Vaulx refers to the possibility that a foreign currency may lose value vs. the U.S. dollar. If a foreign bond pays 15%, but its currency is devalued by 20%, American investors wind up losing money.

TOP 5 INTERNATIONAL BOND FUNDS

Fund Name            Year-to       12-Month       12-Month
(Ticker)             -Date         Total            Yield
                     Total         Return
                     Return(*)

Alliance North       10.86%        19.04%          11.14%
Am Govt Inc
A (ANAGX)

MainStay              8.52         23.00            9.13
Global High
Yield A
(MGHAX)

BlackRock Intl        5.68          5.81            6.36
Bond Svc
(CIFIX)

Payden & Rygel        4.76          6.05            6.19
Global F/I
R (PYGFX)

Smith Barney          4.74          4.51            8.03
Global Govt
A (SBGLX)

                      5-Year        Toll-Free         Minimum
                    Ann. Total        Number     Initial Investment
                      Return

Alliance North      16.11%          800-227-46         $ 250
Am Govt Inc
A (ANAGX)

MainStay Global      N/A            800-624-07           500
High Yield
A (MGHAX)

BlackRock Intl       8.56           800-441-77           500
Bond Svc
(CIFIX)

Payden & Rygel       7.33           800-572-93         5,000
Global F/I
R (PYGFX)

Smith Barney         6.43           888-451-20         1,000
Global Govt
A (SBGLX)

(*) Return as of 7/31/00

Source: Morningstar, Inc.