When trying to diversify your portfolio and keep your risk low then looking into foreign bond market might be the right move. Adding foreign stocks or bonds can help diversify your portfolio greatly as long as the country your stocks or bonds are in is not heavily correlated with your own home country. Bonds are a safer investment than stocks but do not give back the same potential gains you could receive with a stock. This means it is a much safer market and for investors looking to not take many risks. The opportunities to invest in foreign bonds have only been growing over the years and many economists only see that trend increasing.

In 2008 60% of the bond market was foreign with 40% being in the United States, and that includes the bonds issued in emerging markets and small European companies. With interest rate being different in most countries foreign bond investing would help balance your portfolio when there is a downturn in the US economy, as happened recently. Even though most people look at the bond market as a low return safe investment, foreign bonds offer a better return than the bond market in the United States. Over the past 15 years the US bond market has only been the top perform twice. This means that if you diversify with foreign bonds you will know that part of your portfolio will always be exposed to the best performing bond market in the world.

Investing in foreign bonds may also help your loss exposure when looking at the decline of your home currency. Your foreign investment may help offset the decline a little and make your potential loss not as great. However there is a risk to investing in foreign bonds and that is interest rate risk. Since interest rates differ in other countries you never really know how they will change, and if you have bonds in small emerging market they face political risk as well.

Sources:

"Benefits of International Bonds." T. Rowe Price, Web. 13 Dec 2009. <http://individual.troweprice.com/public/Retail/Mutual-Funds/International-Funds/Benefits-of-International-Bonds>.