Investors who go global find government bonds are the horse of choice

GLOBAL stocks are like exotic racehorses, captivating world-oriented investors with their pedigrees and their promise. But the true beast of burden in global investing is the government bond. And for good reason: Government bonds issued by blue-chip countries - the United States, Japan, Britain, West Germany, France, Canada, the Netherlands, Australia, and Switzerland - are safe and easy to understand.

They're also no problem to resell. They give an investor a ride on both a nation's economic fortunes and on international exchange rates. And fewer and fewer governments are deducting withholding taxes from them.

Government bonds in those nine blue-chip countries total about $4.7 trillion, with the US accounting for just over half the total. Overseas investors - especially the Japanese - have, of course, been very active in the US bond market. And American investors, most of them institutions such as mutual funds and pensions, are increasingly pursuing value abroad.

``People have seen significant returns in the non-dollar [bond] market,'' says Vilas Gadkari, who helped compile Salomon Brothers' world government bond index. The returns, coupled with a growing interest in global diversification, he says, ``make the non-dollar market much more relevant.''

Government bonds are essentially a gauge of how nations are doing economically. But it takes an attentive eye to international economics and the wealth of nations to know when to buy and how long a maturity to go after. Inflation, interest rates, exchange rates, and trade and budget deficits are a delicate balance; if one improves for the bond buyer, another may worsen.

Les Namberg, who manages Massachusetts Financial Services' International Trust-Bond Portfolio, points out that even the ``political environment of a country'' is important to consider.

Mr. Namberg's $140 million fund is now heavily weighted toward West Germany, France, and European Currency Unit issues (50 percent), with Japan, Britain, and Australia/New Zealand each accounting for 10 percent of the fund and the balance in US Treasuries and US corporate bonds.

Among the keys to following the world government bond market:

Nature of the economy. A manufacturing economy like Japan may be stable, but its export orientation could mean future problems for both its currency and interest rate picture. A commodity economy like Australia is not too attractive today. But the economic mix of West Germany seems ideal, and the US is not badly positioned, either.

Quality. This is a sine qua non in the government bond market and the reason that only first-world nations are preferred by bond buyers.

Transactionability. Australia and Britain are attractive on this score, says Mr. Gadkari, but Italy, which has the fourth-largest government bond market in the world, is not, because of its floating rate notes and short maturities.

Currency risks and gains. A new 10-year US Treasury bond might have an initial yield of 7 percent today. A similar West German bond would yield 6 percent. But, as Namberg points out, Bonn has reduced its budget deficit, is experiencing negative inflation, and is committed to controlling its money supply. This could mean a stronger deutsche mark, and it could mean lower interest rates. These factors could put the 10-year German bond well above the US Treasury in terms of total return.

The currency play is perhaps the most crucial decision.

Using the Salomon Brothers index, one can see that Americans who snapped up Japanese bonds before the big shift in the yen-dollar exchange rate would have profited handsomely by now. A Japanese investor holding 10-year Japanese government bond bought in early 1985 would have seen an 18 percent increase in its total return by October of this year (there's no exchange-rate differential because this investor bought in yen and will get paid in yen).

But an American holding the same bond could have gained some 82 percent in the same time span, since he paid fewer dollars for the bond in early '85, when the yen was relatively weak, and could get more dollars for it today, with the strong yen.

One drawback, however: Unlike most other governments, Japan still maintains a withholding tax on bonds; that cuts into the profit.

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