BOND GAMBITS FOR THE NEW EURO ZONE The birth of the euro presents a challenge for managers of international bond funds. When 11 European currencies converge into one on Jan. 1, managers will no longer be able to take advantage of differences among most currencies' values to diversify their holdings and boost investor returns. ''That game is over,'' says Christoper Durbin, head of fixed income for J.P. Morgan in London. But managers aren't running out of diversification strategies. They will still be able to broaden their portfolios by seeking out euro-denominated corporate and government bonds with varying credit ratings. And they'll still have a few currency plays left: Britain, Greece, and Sweden, while European Union members, aren't embracing the euro for now. Take Maria Fiorini Ramirez, manager of Lexington Ramirez Global Income fund and the MFR group of funds. She is buying short- and long-term Greek government debt, which is yielding 950 and 300 basis points more than short and long German government borrowings, respectively. She figures Greece will eventually slash its debt enough to qualify to join the European Monetary Union. When that happens, the yield spreads should collapse, and Greek bonds will rally. That's already happened in Italy. Traders used to view Italy as more economically and politically risky than Germany, so Italian government bonds paid investors sky-high yields. Only three years ago, these bonds yielded 525 basis points over their German equivalents. But when the Italians became committed to cutting deficits as the condition for joining EMU, the yield differential shrank to today's 25 basis points. Ramirez also likes British government bonds and Danish mortgage debt; they offer higher yields than most other debt in Europe. And other managers are moving into Europe's budding corporate bond market. Worth $325 billion now, it could exceed the $2 trillion U.S. market in five years. Loomis Sayles Global Bond Fund manager John de Beer expects ''the euro will open up the market to many companies that never issued bonds before,'' because buyers won't have to deal with currency risk. Picking out undervalued bonds will enhance returns, while the wider choice of corporate issuers will help managers diversify their holdings, de Beer says. He owns the high-yield Deutsche mark debt of Geberit International, a Swiss maker of bathroom plumbing fixtures. Until the corporate bond market develops more fully, managers are casting a wide net, looking at countries they hadn't considered previously. Given the progress in Eastern Europe, ''there is actually more diversity than before,'' says Gabriel Irwin, co-manager of the Global Total Return and Prudential International bond funds. The number of countries he invests in has risen from 14 to 30 in the last five years. Despite investor jitters lately, Irwin is buying dollar-denominated Russian government debt and is eyeing three-month, ruble-denominated paper, which yields 2,700 basis points over German government bonds. He also has positions in local currency and dollar-denominated Polish and Hungarian government debt. Many expect Eastern Europe to join the euro zone. But that remains some time off. Meanwhile, even as Western Europe draws together under the banner of one currency, the region still provides plenty of ways for savvy bond investors to boost their returns. Toddi Gutner RELATED ITEMS TABLE: Casting a Wide Net

Updated May 21, 1998 by bwwebmaster
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