As U.S. Treasury yields continue to fluctuate wildly due to America's uncertain debt and fiscal policy, investors are increasingly considering international fixed-income investments as a safer alternative. According to Rebecca Venter, senior fixed income product manager at Vanguard, this interest in international bonds is not just justified, but perhaps long overdue.
Recently, concerns regarding U.S. rates and Treasury risks have spurred interest in allocating investments internationally. As per Venter, investors tend to seek more stability during such unsure times and thus look globally, diversifying their portfolios and investing in high-quality government bonds that offer less exposure to potential economic risks.
However, investing internationally is not just about dodging instability. Vanguard has found that a global approach to fixed income can enhance risk-adjusted returns over the long term, irrespective of annual return fluctuations. It recommends that U.S. investors allocate approximately 30% of their fixed-income portfolios to international bonds, primarily starting with developed market sovereign debt.
Diversifying with global bonds not only provides access to different geographical locations but also to entirely distinct inflation regimes, regulatory structures, and economic cycles. This variety allows for diversification across economic abilities, yield curves, sector maturities, and credit qualities.
Investors can gain this diversification through various means. For example, Vanguard’s BNDX ETF passively tracks high-quality international bonds and mitigates currency exposure to the U.S. dollar. Actively managed options, like Vanguard's Global Credit Bond Fund (VGCIX), aim to explore every opportunity while maintaining low fees.
Despite the conceivable benefit, investing globally comes with risks, and currency risk is a major concern. Hedging, however, can help minimize this risk while adding very minimal costs. Even emerging markets, known for their supposed extreme volatility, can offer solid investment grade opportunities.
Ultimately, exploring international bonds can lend investors a sense of security, offer better yields, and foster greater portfolio resilience. Regardless of whether one starts with a low-cost index fund like BNDX or global credit strategies with active management, international fixed-income securities can create a comprehensive portfolio, especially when domestic uncertainty is a primary concern.