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Thomas Kenny

The Best Performing Foreign Developed Bond Markets of 2012

By January 2, 2013

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The extent to which an investment in the foreign developed markets paid off during 2012 largely depended on which investment vehicle you picked: one priced in foreign currencies, or one priced in U.S. dollars. Based on the return of the J.P. Morgan Government Bond Index foreign government bonds produced modest returns of just 1.1% during 2012 when performance was measured in U.S. dollar terms. In local currency terms, however, the asset class gained registered a more impressive gain of 5.1%.

The primary reason for the gap return between U.S. dollar and local currency returns was Japan, where government bonds rose 1.7% in local currency terms but lost -8.9% in U.S. dollars due to the sharp decline in the value of the yen. Japan is has a large weighting in the index, so the yen's poor performance accounted for almost all of the gap between the 5.1% local currency return and the 1.1% U.S. dollar return.

Learn more: How do currencies impact bond market performance?

The story was different in Europe, where currencies generally strengthened against the dollar and therefore added to returns for U.S. investors. The bond and currency markets investors reacted positively to the efforts of the European Central Bank and the region's governments to alleviate the effects of the debt crisis.

The returns of the countries represented in the J.P. Morgan Government Bond Index are as follows (all data through December 30). These returns are shown in both local currency terms and U.S. dollar terms to demonstrate the impact of currency fluctuations on short-term performance:

  • Italy: 21.1% local, 23.4% U.S. dollar
  • Belgium: 16.1%, 18.2%
  • France: 9.7%, 11.7%
  • Netherlands: 5.9%, 7.9%
  • Spain: 5.9%, 7.9%
  • Australia: 5.3%, 6.4%
  • Germany: 4.4%, 6.3%
  • Denmark: 3.7%, 5.2%
  • U.K.: 2.7%, 6.6%
  • Canada, 2.4%, 5.0%
  • Japan, 1.7%, -8.9%
  • Sweden, 1.3%, 6.6%
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