International Bond ETFs Breakout (PCY, BWX)

The yields on the U.S. government issued bonds have started a new downtrend after the government shutdown and poor jobs numbers.

The thought process on Wall Street is that taper will not arrive until the first quarter of next year at the earliest. Without tapering on the table it opens the door for bond investors to push up prices as yields decline.

The yield on the 10-year Treasury bond is at 2.47 percent, the lowest in three months.

Investors may be able to play U.S. bond ETFs during the rally, however the income paid out remains low and the rally will not last forever. A better option is to look outside the borders of the U.S. at international bond ETFs.

Both developed and emerging market international bond ETFs are offering higher yields as well as more upside potential.

Two ETFs to consider are below.

PowerShares Emerging Markets Sovereign Debt ETF (NYSE:PCY)

The ETF invests in liquid emerging market U.S. Dollar-denominated government bonds issued by approximately 22 different countries. The countries that make up the highest allocations are Romania, Hungary, South Korea, and Poland. The current yield on the ETF is 4.9 percent and it has lost 10.6 percent of its value in 2013.

Because the bonds are denominated in U.S. Dollars, the weakness in the greenback this year has weighed on the total performance of the ETF. Recently the ETF has started to gain momentum and hit a new four-month high as it rallied over 7 percent from the September low. If the value of the U.S. Dollar continues to lag it could hold back PCY from further gains in the coming months.

iShares Global ex USD High Yield Corporate Bond ETF (NYSE:HYXU)

The index tracks an index that consists of high yield corporate bonds with ratings below investment grade. The bonds are denominated in Euros, British Pounds, or Canadian Dollars. The goal is to provide exposure to the global high yield corporate bond universe without exposure to U.S. Dollar. Therefore, U.S. investors would benefit from a falling greenback because it will increase the conversion rate from the foreign currencies.

The ETF is up 7.3 percent in 2013 and the current yield is 4.35 percent. The ETF bottomed in mid-July as the U.S. Dollar Index hit a peak. Since that time the ETF has rallied nearly 13 percent. The countries with the highest exposure include France, Netherlands, and Luxembourg. Nearly 85 percent of the bonds are denominated in the Euro and the to sector represented is industrials. The ETF recently closed at a new all-time high as the U.S. Dollar hit a new multi-year low.

The two ETFs vary dramatically with PCY investing in emerging markets, government bonds, and denominated in U.S. Dollars. On the other side is HYXU that invests in developed markets, corporate bonds, and not denominated in U.S. Dollars. The performance in 2013 shows the distinct difference in composition. Both could be owned to the diversity.