Investing – My Thoughts on the New T. Rowe Price Emerging Markets Local Currency Bond Fund

I am always looking for funds and investments that are both relatively conservative and align with my basic economic outlook.  Since I generally believe stocks are overvalued and are being held up entirely by government stimulus and central bank money printing, I am inclined to keep my modest investments “safe” in CDs, money markets and short term bond funds.  Unfortunately, we live in a time where interest rates are simply too low.  They are too low because they do not reflect the level of risk they carry.  The risk of future default and inflation are simply much higher than the 0% to 4% you can earn on bonds.  This brings me to the new T. Rowe Price Emerging Market Local Currency Fund.


Fund overview

At first glance, this fund certainly sounds interesting.  Here is a snippet from the web site:

Invests at least 80% of net assets in government and corporate bonds that are denominated in emerging markets currencies. The fund may invest in unrated or below investment grade bonds.

This fund offers investors the potential for high current income and capital appreciation by investing in bonds that are denominated in emerging markets currencies, and in derivative instruments that provide investment exposure to such securities. Emerging market bonds include fixed rate and floating rate bonds that are issued by governments, government agencies, and supranational organizations of, and corporate issuers located in or conducting the predominant part of the business activities in, the emerging market countries of Latin America, Asia, Europe, Africa, and the Middle East.

The key here is that this fund is playing on the “short US dollar” trade.  That is, if you believe the US Dollar will continue to go down in value, this fund should benefit.  The trick however is that all fiat currencies go down in value, just at different rates.  So the question is, will other currencies go down in value slower, relative to the dollar.  Additionally, this fund will benefit from interest paid on the foreign currency bonds it holds.

Why I am considering it

I am considering this fund for several reasons.

  1. I like the idea of diversifying some money out of US Dollars.
  2. The fund should earn a relatively high rate of interest, especially when compared to local US rates.
  3. The fund offers exposure to a bunch of countries, many of whom you don’t get in your typical international bond fund.

Why I am hesitant and risks to consider

The risks unfortunately are many and I am pretty hesitant to want to put too much money to work in this fund:

  1. The fund is brand new (started 5/31/2011) and its performance and management team have not been proven.
  2. The short US dollar trade is pretty crowded and if problems in Greece, Spain and other countries get worse this fund fund could lose value.
  3. If foreign central banks devalue their currencies faster than the Federal Reserve does ours, this fund could lose significant value.
  4. If global interest rates rise (and I think they will) this fund could lose significant value.
  5. This fund invests in countries that could face civil and political unrest.  This could lead to large defaults.

T. Rowe Price Logo

Be sure to read the funds prospectus before investing.


Important Note: This fund is not FDIC Insured and is not Bank Issued, Guaranteed or Underwritten.  This fund may lose value.  Investing in securities products involves risk, including possible loss of principal.  As interest rates rise, existing bond prices fall.

Disclosure: I do not currently own this fund, but I am considering a small investment in the future.  Invest at your own risk.

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