such as the U.S. and Great Britain. Yet investors may find strong opportunities in robust developing markets—not just China and India, but also regions such as the Middle East and Latin America. Telecom, retail and infrastructure suppliers, all expanding to meet the growing demands of their suddenly more affluent consumers, appear particularly promising. And because these deals tend to be smaller than those in the U.S., credit and leverage typically play a smaller role.

Burgeoning economies in developing nations offer significant growth potential. A stake in a redevelopment project in South Asia, for example, could offer a chance for growth on a scale difficult or impossible to achieve on the more developed shores of the U.S. or Europe. Yet with that added potential comes risk, which investors might choose to mitigate through a private equity fund of funds that spreads capital across a number of areas and industries. Still, overseas private equity deals are best suited to investors who are willing to absorb the significant risks that come with them.

During the past 15 years, as central bank policies have made global interest rates more consistent and reliable, global bond offerings have also greatly expanded. Many overseas bonds are turning out to be surprisingly useful hedges against inflation. With demand from emerging markets pushing up the prices of raw materials, energy and other commodities, those countries are the first to feel inflationary effects, given their heavy reliance on these commodities to produce so many of the world’s manufactured goods. (Only later are the higher prices passed on to consumers of finished goods.) Because inflation leads to higher interest rates, this lag time means that overseas bonds might offer higher yields than comparable U.S. bonds.

What’s more, as a general rule world bond prices do not rise and fall in unison. Interest rates in Europe, for example, may be significantly more attractive than the Federal Reserve Target Rate in the U.S. That illustrates the advantages of owning a variety of bonds from around the world as a form of diversification.

Investors can diversify their bond portfolios with an allocation of 5% to 10% in international bonds. They must note, however, that income from overseas bonds is taxed as ordinary income, so a 5% yield on a non-U.S. bond may amount to only 3% after taxes—the same yield delivered by a five-year tax-free municipal bond purchased in the U.S. Therefore, desire for diversification rather than the potential for higher yield should be the goal of investing in international bonds.