Foreign Bonds
Foreign Bonds
Questions:
If one invests in bonds for safety, does it make sense to diversify in bonds from a variety of markets/countries?
Bogle advises that the percentage of bonds in one's portfolio should roughly equal one's age. 100% of bonds in US currency seems risky. Am I wrong? If not, what percentage of bonds should be foreign?
If one invests in bonds for safety, does it make sense to diversify in bonds from a variety of markets/countries?
Bogle advises that the percentage of bonds in one's portfolio should roughly equal one's age. 100% of bonds in US currency seems risky. Am I wrong? If not, what percentage of bonds should be foreign?
Re: Foreign Bonds
For safety, you have short-term US government bonds. If the government collapses and your bonds become worthless, then that would probably lead to world-wide stock and bond market collapses as well. By then, you're primary problem likely would be procuring food, bullets, and toilet paper, not your asset allocation.Jagman wrote:Questions:
If one invests in bonds for safety, does it make sense to diversify in bonds from a variety of markets/countries? ... 100% of bonds in US currency seems risky. Am I wrong? If not, what percentage of bonds should be foreign?
So I'd probably go with Bogle.
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Here's what I want to know: where did a lot of people suddenly get the idea of investing in foreign bonds? If the original poster wouldn't mind, to the best of your recollection, what gave you the idea of asking about it?
I've been on this forum since mid-2007, and can't remember anyone ever asking about it until very recently. Now postings on this are frequent.
Yet it seems to me that any rationale for foreign bonds would have been equally valid at almost any time. And if, in fact, people are saying "diversification" but really mean "currency speculation," then the questions about it should have started just about the same time as the dollar started to weaken, which was very noticeable by 2003 or 2004. Why foreign bonds right now? Why shouldn't they have always been there along with foreign stocks? Why do mainstream sources like Malkiel's "A Random Walk Down Wall Street" suggest foreign stocks and not even mention foreign bonds?
I'm skeptical. I'm also lazy and full of inertia. I just automatically resist any trendy new idea that suddenly seems to come out of nowhere. And while I'm interested in "diversification," anything connected with "currency speculation" is not for me.
I've been on this forum since mid-2007, and can't remember anyone ever asking about it until very recently. Now postings on this are frequent.
Yet it seems to me that any rationale for foreign bonds would have been equally valid at almost any time. And if, in fact, people are saying "diversification" but really mean "currency speculation," then the questions about it should have started just about the same time as the dollar started to weaken, which was very noticeable by 2003 or 2004. Why foreign bonds right now? Why shouldn't they have always been there along with foreign stocks? Why do mainstream sources like Malkiel's "A Random Walk Down Wall Street" suggest foreign stocks and not even mention foreign bonds?
I'm skeptical. I'm also lazy and full of inertia. I just automatically resist any trendy new idea that suddenly seems to come out of nowhere. And while I'm interested in "diversification," anything connected with "currency speculation" is not for me.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
My guess is the growing use of ETFs are making them more accessible.nisiprius wrote:Here's what I want to know: where did a lot of people suddenly get the idea of investing in foreign bonds? If the original poster wouldn't mind, to the best of your recollection, what gave you the idea of asking about it?
I've been on this forum since mid-2007, and can't remember anyone ever asking about it until very recently. Now postings on this are frequent.
Reason: It is just recently that the dollar demise is sinking in.
I have struggled with this issue for quite a few years, simply because I leave overseas and I feel the issue daily. So, part of my bonds are in foreign currency and part in TIPs and more than 50% of my stock ETFs are in foreign companies. Short of moving my money to euros, I do not see what more I can do. Scary!
Any advice? Erwin
I have struggled with this issue for quite a few years, simply because I leave overseas and I feel the issue daily. So, part of my bonds are in foreign currency and part in TIPs and more than 50% of my stock ETFs are in foreign companies. Short of moving my money to euros, I do not see what more I can do. Scary!
Any advice? Erwin
Erwin
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Jack Bogle says - skip foreign bonds. He earns his money in dollars, he spends his money in dollars, and he invests his money in dollars.
The contrarian position would be that even if you spend your money in dollars, the things you buy are weighted against international currency values thus you may not be able to buy what you expected to be able to buy with those saved dollars in 30 years.
That being said I have advocated foreign unhedged bond funds for 3 years. Check out PFBDX pimco fund. I think 5% to 10% allocation of overall portfolio is worthwhile.
The contrarian position would be that even if you spend your money in dollars, the things you buy are weighted against international currency values thus you may not be able to buy what you expected to be able to buy with those saved dollars in 30 years.
That being said I have advocated foreign unhedged bond funds for 3 years. Check out PFBDX pimco fund. I think 5% to 10% allocation of overall portfolio is worthwhile.
You actually have a reason to own foreign bonds. The average US investor doesn't.mpt follower wrote:Reason: It is just recently that the dollar demise is sinking in.
I have struggled with this issue for quite a few years, simply because I leave overseas and I feel the issue daily. So, part of my bonds are in foreign currency and part in TIPs and more than 50% of my stock ETFs are in foreign companies. Short of moving my money to euros, I do not see what more I can do. Scary!
Any advice? Erwin
Here's Rick Ferri on foreign bonds from an IU article posted today:
PaulIU.com: Do you think some of the “new” asset classes that are attracting attention right now, such as currency or international bonds, can help investors manage risk?
Ferri: We take our currency risk by buying unhedged international equities. You get free currency diversification that way. We are not doing a straight currency overlay or taking on additional currency risk. I don’t think you need to.
As far as international bonds, I look at those all the time. I look and look and look and look, and I think, “Give me a real good reason to own these.”
I know the yield is one thing, but what are you really getting? Currency diversification? It’s an awfully high price to pay for currency exposure. If you could invest in international bonds with no expense ratio or tax consequences, they might make sense, but you can’t do that.
At least for the time being, we’re not going that direction. I don’t see the need and I don’t want to pay the fees they are charging for those products.
I've been using foreign bonds since 2004, and have mentioned it from time to time.nisiprius wrote:I've been on this forum since mid-2007, and can't remember anyone ever asking about it until very recently. Now postings on this are frequent.
Yup. Which is why I still use them.Yet it seems to me that any rationale for foreign bonds would have been equally valid at almost any time.
Nope.And if, in fact, people are saying "diversification" but really mean "currency speculation,"
Yes, and then there is this old (well, 5 years ago anyway) Money Magazine interview where John Bogle actually made a modest international bond recommendation for those with a really ... really, long-term investment horizon: http://money.cnn.com/2004/02/19/magazin ... /index.htm
All things in moderation I guess.
All things in moderation I guess.
Surely that merely changes the definition of "domestic," and doesn't affect the validity of arguments for or against "foreign" (= non-domestic) bonds, no?stratton wrote:But, your "location" is listed as Japan. You're an example of who *should* have foreign bonds because you don't live in the US. Holding a portion of your funds in ex-US bonds is a good idea.
To be clear, by "foreign bonds" wrt my portfolio I mean non-Japanese bonds, in several currencies. (And in some crude approximation of world market weights, within limitations imposed by availability at my broker -- i.e., a DIY index). So arguments for or against this should exactly parallel arguments for or against non-US bonds for a US-based investor. (Unless you're into the carry trade, but my name is not Mrs. Watanabe -- though reportedly Mrs. Watanabe seems to have emigrated to the US recently.)
I have actually been invested in foreign bonds for about a decade, but the fund is hedged...Fidelity's New Markets Income (FNMIX). I was not investing for safety or for currency diversification, but simply because the fund had good returns, which were not highly correlated with the rest of my portfolio.nisiprius wrote:Here's what I want to know: where did a lot of people suddenly get the idea of investing in foreign bonds? If the original poster wouldn't mind, to the best of your recollection, what gave you the idea of asking about it?
I've been on this forum since mid-2007, and can't remember anyone ever asking about it until very recently. Now postings on this are frequent.
I am now trying to keep my bond allocation equal to my age, and for that portion of my portfolio, I am thinking more about safety. If I keep to the formula of age = % of bonds, then my bonds will eventually crowd out whatever currency diversification I currently have in stocks. Does currency diversification matter? If it does, then it would make sense to own unhedged foreign bond funds, if they can be owned cheaply.
I never considered foreign bonds until they became an offering in my 401k last year.
I read Swedroe's book on bonds and there is a chapter devoted to international fixed income. The suggestion which stood out to me was that the emerging market portion of intl fixed income should be considered as part of the equities, and not the bonds, in a portfolio, due to volatility and the various risks involved.
I read Swedroe's book on bonds and there is a chapter devoted to international fixed income. The suggestion which stood out to me was that the emerging market portion of intl fixed income should be considered as part of the equities, and not the bonds, in a portfolio, due to volatility and the various risks involved.
BTW most EM bonds are not hedged. They are/were issued in USD. The difference can be important because the latter has currency risk.amplifier wrote:I never considered foreign bonds until they became an offering in my 401k last year.
I read Swedroe's book on bonds and there is a chapter devoted to international fixed income. The suggestion which stood out to me was that the emerging market portion of intl fixed income should be considered as part of the equities, and not the bonds, in a portfolio, due to volatility and the various risks involved.
Hedging is done by the fund with bonds issued in another currency. No currency risks for anyone making bond interest payments.
Issued in USD means if the dollar gets stronger the issuing country has to pay more in their local currency and this raises the chances of default because of increased costs.
Paul
There have been several threads on foreign bonds and currency risk since 2007, for example:
Swedroe on foreign bonds
Academics tested a hypothesis and found "this implies that home bias should be higher for bonds than for equities as bond returns typically are less volatile than equity returns. It also means that a reduction of exchange rate volatility should have a larger impact on bond home biases than on equity home biases."
Home-Country Bias?
world currency hedging
The benfits of currency diversification may be unstable or unpredictable.
Another study found that from 1978 through 2001
"For a German investor holding foreign currencies resultet in additional diversification benefits. This is in contrast to the results for French, British and US investor which could significantly benefit from a full currency hedge in all portfolios shown in Tables 2 – 4. This is particularly true for British and US investors that could increase the Sharpe ratios of their
portfolios by a very large amount due to avoiding the risk of foreign currencies"
But I don't think this predicts the future.
Swedroe on foreign bonds
Academics tested a hypothesis and found "this implies that home bias should be higher for bonds than for equities as bond returns typically are less volatile than equity returns. It also means that a reduction of exchange rate volatility should have a larger impact on bond home biases than on equity home biases."
Home-Country Bias?
world currency hedging
The benfits of currency diversification may be unstable or unpredictable.
Another study found that from 1978 through 2001
"For a German investor holding foreign currencies resultet in additional diversification benefits. This is in contrast to the results for French, British and US investor which could significantly benefit from a full currency hedge in all portfolios shown in Tables 2 – 4. This is particularly true for British and US investors that could increase the Sharpe ratios of their
portfolios by a very large amount due to avoiding the risk of foreign currencies"
But I don't think this predicts the future.
I have owned foreign bond funds for quite a while. One is a "Yankee Bond" which means that it owns foreign debt that is denominated in dollars. The other one is a Global bond fund, and it invests in both dollar and foreign currency denominated debt.
My rationale is that developed (and developing) governments also need infrastructure. The US debt market is the largest one in the world, but it is not the only market. "Market portolio" is bantered around often, but it only seems to be used in context with VTSMX, and "bonds for safety" meaning Treasuries. In terms of safety, I would consider the major European nations to be relatively safe.
I own domestic multi-sector bonds and equities. It makes sense to me to own multi-sector Foreign debt and equities. I also own both foreign and domestic REIT.
My underlying belief is that 90% of the world cannot continue to depend on 10% of the population to be their customer. The middle class will have to grow in foreign countries also. How many potential first time homeowners are there in China or India?
In many cities in India today, people use the street for the bathroom. It is not uncommon to see someone squatting in the bushes alongside a busy sidewalk.
They need infrastructure too, and are willing to issue bonds ....
My rationale is that developed (and developing) governments also need infrastructure. The US debt market is the largest one in the world, but it is not the only market. "Market portolio" is bantered around often, but it only seems to be used in context with VTSMX, and "bonds for safety" meaning Treasuries. In terms of safety, I would consider the major European nations to be relatively safe.
I own domestic multi-sector bonds and equities. It makes sense to me to own multi-sector Foreign debt and equities. I also own both foreign and domestic REIT.
My underlying belief is that 90% of the world cannot continue to depend on 10% of the population to be their customer. The middle class will have to grow in foreign countries also. How many potential first time homeowners are there in China or India?
In many cities in India today, people use the street for the bathroom. It is not uncommon to see someone squatting in the bushes alongside a busy sidewalk.
They need infrastructure too, and are willing to issue bonds ....
- nisiprius
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Not a good reason.Boglenaut wrote:My guess is the growing use of ETFs are making them more accessible.nisiprius wrote:Here's what I want to know: where did a lot of people suddenly get the idea of investing in foreign bonds?
Not a good reason.amplifier wrote:I never considered foreign bonds until they became an offering in my 401k last year.
Good reason.bpp wrote:I've been using foreign bonds since 2004, and have mentioned it from time to time.Yup. Which is why I still use them.Yet it seems to me that any rationale for foreign bonds would have been equally valid at almost any time.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Argentina 2002. Ecuador almost, recently. Mexico in 1994 nearly defaulted, only a legal trick pulled by the US Treasury Secretary avoided it (the law said the Treasury could use the money to stabilize the economy in a crisis, but didn't specify WHICH economy, IIRC).neverknow wrote:spam, you are so comfortable with your viewpoint, my guess is that you are not old enough to recall Brazil defaulting on it's debt (late 80's, if I remember correctly). I am not so comfortable, though I realize the financial viability of various countries had changed a lot, in more recent decades.spam wrote: My rationale is that developed (and developing) governments also need infrastructure. The US debt market is the largest one in the world, but it is not the only market.
Sort of like the dot.com bust burned me, and I am hesitant to believe in tech companies who have no net earnings. Fool me once, shame on you - fool me twice, shame on me.
neverknow
Argentina is breaking the rules. the rules say you default, then you reschedule with IMF, then you pay back 60-80 cents on the dollar. Argentina is refusing.
Germany UK France Canada Australia you are almost certain the debts will get repaid unless we go into a 1930s scenario. Dutch. Switzerland. China probably.
Places like Korea and Japan are OK. Brasil is obviously far better run than it was, so is Mexico.
1930s style commodity price crash, half the world's debtors will be in trouble.
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International Bonds
Hello Jagman,
IMO, international bonds provides currency diversification for your fixed income portfolio. FWIW, 17% of my fixed income portfolio is in a foreign bond fund that I have in my 401k Plan (i.e., Oppenheimer International Bond; OIBYX). It has a volatilty similar to TIPs funds such as VIPSX and its expense ratio is a reasonable 0.54%. Look at the portfolio of PIMCO's Total Return Bond Fund and it has an allocation to international bonds.
In general, if you are unsure of an investment type, it is best not to investment in it. As for what amount, that is up to you should you decide to add international bonds to your portfolio.
The reason you may not see much talk about foreign bonds is that Vanguard does not offer a foreign bond fund. The reason you now be thinking about international bonds is the current talk about the falling dollar, gold, commodities and the potential for emerging countries to question pegging assets to dollars in light of our country's current financial and fiscal problems.
Best wishes,
Bill
IMO, international bonds provides currency diversification for your fixed income portfolio. FWIW, 17% of my fixed income portfolio is in a foreign bond fund that I have in my 401k Plan (i.e., Oppenheimer International Bond; OIBYX). It has a volatilty similar to TIPs funds such as VIPSX and its expense ratio is a reasonable 0.54%. Look at the portfolio of PIMCO's Total Return Bond Fund and it has an allocation to international bonds.
In general, if you are unsure of an investment type, it is best not to investment in it. As for what amount, that is up to you should you decide to add international bonds to your portfolio.
The reason you may not see much talk about foreign bonds is that Vanguard does not offer a foreign bond fund. The reason you now be thinking about international bonds is the current talk about the falling dollar, gold, commodities and the potential for emerging countries to question pegging assets to dollars in light of our country's current financial and fiscal problems.
Best wishes,
Bill
Up until now, the funds have just been too expensive for me. And for someone in a high tax bracket, there is the problem of bonds in a taxable account or losing the foreign tax credit in a non-taxable account.
Even the current ETFs are marginal, IMO, with ER of 0.35% on foreign government bonds and not as much liquidity as I would like to see, but I am carefully watching them.
I spend about 70% of my cash in non-dollar currencies.
I am in a low tax bracket and so can consider holding foreign bonds in a taxable account. Also, I don't get full benefit of getting refund on foreign taxes I pay while holding mutual funds that hold foreign stocks, so if the foreign bond funds have low level of foreign taxation, they actually increase my tax credit for all my holdings (that's right, I can pay a little more foreign taxes, but get much more than that back via the FTC by lowering the overall percentage of foreign taxes paid on funds). I will be carefully looking at the ishares tax statements at the end of the year to see level of foreign taxes paid.
But my situation is unusual (non-dollar spending, low tax bracket, FTC issues), I do not think foreign bonds are worth the trouble for most ordinary investors when it is just as easy to hold foreign stocks.
Kramer
Even the current ETFs are marginal, IMO, with ER of 0.35% on foreign government bonds and not as much liquidity as I would like to see, but I am carefully watching them.
I spend about 70% of my cash in non-dollar currencies.
I am in a low tax bracket and so can consider holding foreign bonds in a taxable account. Also, I don't get full benefit of getting refund on foreign taxes I pay while holding mutual funds that hold foreign stocks, so if the foreign bond funds have low level of foreign taxation, they actually increase my tax credit for all my holdings (that's right, I can pay a little more foreign taxes, but get much more than that back via the FTC by lowering the overall percentage of foreign taxes paid on funds). I will be carefully looking at the ishares tax statements at the end of the year to see level of foreign taxes paid.
But my situation is unusual (non-dollar spending, low tax bracket, FTC issues), I do not think foreign bonds are worth the trouble for most ordinary investors when it is just as easy to hold foreign stocks.
Kramer
Very interesting comments in this thread, thanks to all. I'll just repeat some revealing data I mentioned in another thread recently regarding one bond fund that's been around awhile:
Just looked at T. Rowe Price and came up with International Bond Fund: http://www3.troweprice.com/fb2/fbkweb/o ... cker=RPIBX
ER=0.81% ... steep for a bond fund
Whereas VBMFX was 6.30% ... but no real dollar crisis during that time. I calculate that the dollar declined -2.4% annually over the last 10 yrs. So seems the International Bond Fund did not really pay off.
P.S. This thread on hedged/unhedged foreign bonds was very good with Swedroe and Swenson comments:http://www.bogleheads.org/forum/viewtop ... torder=asc
Just looked at T. Rowe Price and came up with International Bond Fund: http://www3.troweprice.com/fb2/fbkweb/o ... cker=RPIBX
ER=0.81% ... steep for a bond fund
Performance for 10yrs: 6.07%Normally, the fund will invest at least 80% of net assets in bonds and 65% of total net assets in high-quality (AA or better) foreign bonds.
There are no maturity restrictions, and the fund’s weighted average maturity normally ranges between five and 10 years but may vary substantially because of market conditions. The fund has wide flexibility to purchase and sell currencies and engage in hedging transactions. However, the fund will not usually attempt to cushion the impact of foreign currency fluctuations on the dollar.
Whereas VBMFX was 6.30% ... but no real dollar crisis during that time. I calculate that the dollar declined -2.4% annually over the last 10 yrs. So seems the International Bond Fund did not really pay off.
P.S. This thread on hedged/unhedged foreign bonds was very good with Swedroe and Swenson comments:http://www.bogleheads.org/forum/viewtop ... torder=asc
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Swensen’s view (from Pioneering Portfolio Management)
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Swensen’s view (from Pioneering Portfolio Management)
- “…an unhedged foreign currency bond consists of a US dollar bond plus some foreign exchange exposure.” (assuming similar credit quality and maturity of the bonds).
“In a portfolio context, foreign exchange exposure may produce the benefit of additional diversification. Even with no expected return, the lack of full correlation between currency movements and other asset class fluctuations reduces portfolio risk. However, investors should obtain foreign exchange exposure not through foreign bond positions, but in connection with an asset class expected to produce superior returns, namely foreign equities:
“…unhedged foreign bonds fail to provide the same protection against financial crisis or deflation enjoyed by holders of US Treasury securities. In the event of a market trauma, US investors have no idea what impact foreign exchange rates will have on the value of foreign bond positions. The unknown influence of foreign currency translation forces investors hoping to benefit from fixed income’s special diversifying characteristics to avoid unhedged foreign bond exposure.”
“Foreign-currency-denominated bonds play no role in well-constructed investment portfolios.”
- “It is useful for the global investor to consider a foreign stock or bond in these terms. Assume for a moment that your portfolio contains 35% each domestic stocks and domestic bonds, as well as 15% each foreign stocks and foreign bonds. It makes no difference if the foreign stocks are hedged and the bonds are unhedged, or vice versa. Put another way, the portfolio can be considered to contain 35% domestic stocks, 35% domestic bonds, 15% hedged foreign stocks, 15% hedged foreign bonds, and 15% foreign currency. No matter that the total of all this is 115%—it's an extraordinarily useful device to start with foreign stock and bond returns in local currency ("hedged"), and then to add in the currency component as just another class.
In other words, the foreign currency in your portfolio doesn't know whether it is invested in stocks or bonds.”
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Re: International Bonds
BillBillRogers wrote: The reason you may not see much talk about foreign bonds is that Vanguard does not offer a foreign bond fund. The reason you now be thinking about international bonds is the current talk about the falling dollar, gold, commodities and the potential for emerging countries to question pegging assets to dollars in light of our country's current financial and fiscal problems.
Best wishes,
Bill
The danger with considering the US fiscal problems is that other countries are actually in just as bad or worse shape. The US has 2 important virtues:
- some of the US problems are fixable or being fixed. Too large a housing market relative to GDP? That is being rectified. Too low a savings rate? Ditto. Energy inefficient? Relatively easy to fix.
US banking system is in bad shape, but not worse than the worst hit countries eg UK, Ireland etc.
- demographics are immature whereas demographics in rest of developed world are highly mature. Yes the Baby Boom is a problem but Generation X and Generation Y are big for a developed country. Net new household formation continues and will continue to be large for a long time to come.
The problem is are you buying fixed income diversification or are you buying currency diversification?
The 2 should be separate at least mentally.
On the currency question:
- I've never managed to successfully forecast exchange rates. The leading theory (Purchasing Power Parity ie the difference in inflation rates between the 2 countries causes the currencies to move) just doesn't seem to hold well enough to be any use except in the very long run (30 year plus horizons)
- there is not much fixed income diversification worth having I suspect in foreign bonds. The correlation with equity markets is probably (I suspect) greater, especially with Emerging Markets, and that reduces diversification
The US is a relatively closed economy (exports and imports a relatively small chunk of GDP) compared to other developed economies (the reason being the US trades with itself a lot).
And its next 3 biggest partners include Canada and Mexico which for practical purposes are the same economy.
The best we can say is one should own currency diversification, if one should (most of your retirement liabilities will be denominated in dollars: chiefly healthcare and property costs, retirement homes etc.) as a diversifier.
One should do it in the cheapest place possible. Which is normally equities.
Historically, 20-30% of total portfolio in foreign currency assets (for a US $ investor) has given maximum diversification. This is in foreign equities. But the diversification benefit has been falling over time AND correlation increases in a bear market.
Foreign Small Cap Value equities would diversify even more on Larry Swedroe's numbers.
It has been noted that those of us who live in smaller currency countries (the US is 1/4 world economy) have a greater need for diversification.
If cheap ways of diversifying into foreign fixed income become available, the picture could change. However one has to wonder whether one really wants to diversify into 30% Japanese Government Debt with a 1.5% nominal yield? You are not being compensated with yield there, it's basically a pure bet on Yen appreciation.
(JGBs are c. 30% of developed market bond indices)
An additional factor is tax withholding costs of foreign fixed income funds.
Most of all in this discussion I sense a 'recency' effect-- not in you but in posters getting interested. The USD is down, people are worried, so the tendency is to chase foreign bonds.
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Taking foreign currency exposure with fixed income vs equities can lead to signficant one yr return differences. Consider 2005 returns:
2005 $ return
S&P/Citigroup International Trsy Bond Index Ex-US 1-3 Yr.....-10.8%
S&P/Citigroup International Trsy Bond Index Ex-US................-8.5%
Barclays Capital U.S. 1-3 Year Treasury Bond Index...............+1.6%
Barclays Capital U.S. 3-7 Year Treasury Bond Index...............+1.0%
S&P500...................................................................................+4.9%
MSCI EAFE index....................................................................+13.5%
In adddition, in 2008 US intermediate treasuries provided more downside protection than Intl. treasuries.
The ETFs that try to track the above list of indexes are ISHG, IGOV, IEI, SHY, IVV and EFA respectively.
Robert
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Taking foreign currency exposure with fixed income vs equities can lead to signficant one yr return differences. Consider 2005 returns:
2005 $ return
S&P/Citigroup International Trsy Bond Index Ex-US 1-3 Yr.....-10.8%
S&P/Citigroup International Trsy Bond Index Ex-US................-8.5%
Barclays Capital U.S. 1-3 Year Treasury Bond Index...............+1.6%
Barclays Capital U.S. 3-7 Year Treasury Bond Index...............+1.0%
S&P500...................................................................................+4.9%
MSCI EAFE index....................................................................+13.5%
In adddition, in 2008 US intermediate treasuries provided more downside protection than Intl. treasuries.
The ETFs that try to track the above list of indexes are ISHG, IGOV, IEI, SHY, IVV and EFA respectively.
Robert
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Re: International Bonds
neverknow wrote:
There is a lot of regency - hoopala in the news, but it is not new news, this horse is out of the barn. If all my households income was in US Dollars and we were spending in US Dollars -- at least at present, it does not impact my household budget. But 50% of our household income is in UK Pounds. Currency exchange matters in our household on a monthly basis. My investments are diversified in regard to currencies. But as a household in the USA, we are the exception, not the rule.
neverknow
With this income split, and your expenses nearly 100% in USD you should only diversity outside the UK and US eg a Pacific Basin fund or ETF, and a Euro Fund or ETF.
In any case your primary need is for USD assets. Because you have a big mismatch between your income and your spending.
FWIW I am not bullish on the dollar, and even less so on the pound.
However I don't think we should ignore the fact that other countries themselves have very severe economic problems. And, historically, the US economy is amazingly regenerative. It takes time, but the US is very good at moving out of unproductive economic activities and into productive ones.
The speed with which your automotive industry has been restructured, for example, against that process in other countries which took many years-- ask your spouse about British Leyland!. Although I expect more pain in that sector (a lot more pain) what was done in a relatively few years has been impressive. Factories shut, jobs lost, debts restructured, cost bases lowered.
(Not to be a repetitious boor, but I feel that Kenner's point merits amplification.)kenner wrote:FWIW, 6.6% of Vanguard's Intermediate Term Bond Index Fund (VBIIX) is foreign bonds.
Long Term Bond Index (VBLTX) has 8.4% foreign.
TBM has 3.5% foreign.
Yep, most of the Vanguard bond funds own some percentage of foreign bonds. In this thread, What is your foreign-bond asset allocation?, I posted this chart:
Code: Select all
Symbol Name Percent Foreign Bonds (07/31/2009)
VBISX Short Term Bond Index 6.4
VFSTX Short-Term Investment-Grade 1.1
VBIIX Intermediate-Term Bond Index 6.9
VBMFX Total Bond Market 3.5
VFICX Intermediate-Term Investment-Grade 1.7
VBLTX Long-Term Bond Index 7.9
VWESX Long-Term Investment-Grade 2.7
VWELX Wellington 3.9
VWINX Wellesley 7.6
Last edited by Lucio on Thu Oct 08, 2009 11:11 am, edited 1 time in total.
I really liked this point of view, particularly the last sentence. Thanks for the link Robert.Robert T wrote:...(snip)...
Bernstein’s view To hedge or not to hedgeRobert
- “It is useful for the global investor to consider a foreign stock or bond in these terms. Assume for a moment that your portfolio contains 35% each domestic stocks and domestic bonds, as well as 15% each foreign stocks and foreign bonds. It makes no difference if the foreign stocks are hedged and the bonds are unhedged, or vice versa. Put another way, the portfolio can be considered to contain 35% domestic stocks, 35% domestic bonds, 15% hedged foreign stocks, 15% hedged foreign bonds, and 15% foreign currency. No matter that the total of all this is 115%—it's an extraordinarily useful device to start with foreign stock and bond returns in local currency ("hedged"), and then to add in the currency component as just another class.
In other words, the foreign currency in your portfolio doesn't know whether it is invested in stocks or bonds.”
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Hi Neverknow,neverknow wrote:spam, you are so comfortable with your viewpoint, my guess is that you are not old enough to recall Brazil defaulting on it's debt (late 80's, if I remember correctly). I am not so comfortable, though I realize the financial viability of various countries had changed a lot, in more recent decades.spam wrote: My rationale is that developed (and developing) governments also need infrastructure. The US debt market is the largest one in the world, but it is not the only market.
Sort of like the dot.com bust burned me, and I am hesitant to believe in tech companies who have no net earnings. Fool me once, shame on you - fool me twice, shame on me.
neverknow
Yes, Foreign Bonds can be riskier than Domestic Bonds. The same is generally true for stocks, but most people dont think twice about buying foreign stock funds.
Most of were hammered pretty thin by our stock funds last March, and I suspect a pretty good number of us still own stocks today. In comparison, my foreign bond funds lost less, and have rebounded faster than my equity funds. At the end of the day, prudence is an important virtue when investing offshore.
I think the key is diversification. Not including my emergency fund or operating cash, my foreign bond holdings are around 10% to 12% of my fixed income portfolio. I just harvested the gains from all of my bond funds (foreign and junk led the way) by selling to cash. Just about every fixed income fund I own is trading at or above its historic high.
My funds have quite a few Latin American bonds, so I dont feel the need to buy any Latin American stocks. Developed foreign markets are different to me, and I own both stocks and bonds in many cases.
75% - 80% is FDIC, Domestic Government, and investment grade corporates. 20% to 25% is junk and foreign (yankee) debt.
currency risk and past history
So I have felt for quite a while that the general consensus on this forum makes three main mistakes:
1 - It assumes that if you don't invest in foreign currencies, you are not taking currency risks.
2 - That the past 50 years are good predictors of the future in regards to the stability and performance of the dollar as the world leading reserve currency.
3 - It is acceptable to bundles some types of risks together and assume that you are covered for them separately.
In regards to 1: only investing in a single currency takes on currency risks even if you have to pay your bills in that currency. So much of the price for some many fundamental inputs to our economy are set against global demand that many things will be more expensive if the dollar declines.
In regards to 2: the past 50 years have been an extraordinary period for the US dollar. The effect of WWII and the the role the US played in the following era will likely (hopefully?) not be repeated. I have no idea what that means for the the dollar but I do think past history is going to predict future returns.
In regards to 3: while having equity exposure to foreign currencies does provide some diversification, it couples equity and currency risks. Personally, I am more comfortable being able to have different risks more spread across asset classes. That is part of why I own both un-hedged foreign bond and foreign TIPs funds.
It also seems to me that by saying that one should not own foreign bonds is saying that the market is mis-pricing them. That is, one should tilt away from the market allocation in this case. In that regard it is a pretty active decision.
All of this said, I will agree that this is a very trendy topic at the moment and as a result may be a bad time to actually make these types of adjustments to a portfolio.
1 - It assumes that if you don't invest in foreign currencies, you are not taking currency risks.
2 - That the past 50 years are good predictors of the future in regards to the stability and performance of the dollar as the world leading reserve currency.
3 - It is acceptable to bundles some types of risks together and assume that you are covered for them separately.
In regards to 1: only investing in a single currency takes on currency risks even if you have to pay your bills in that currency. So much of the price for some many fundamental inputs to our economy are set against global demand that many things will be more expensive if the dollar declines.
In regards to 2: the past 50 years have been an extraordinary period for the US dollar. The effect of WWII and the the role the US played in the following era will likely (hopefully?) not be repeated. I have no idea what that means for the the dollar but I do think past history is going to predict future returns.
In regards to 3: while having equity exposure to foreign currencies does provide some diversification, it couples equity and currency risks. Personally, I am more comfortable being able to have different risks more spread across asset classes. That is part of why I own both un-hedged foreign bond and foreign TIPs funds.
It also seems to me that by saying that one should not own foreign bonds is saying that the market is mis-pricing them. That is, one should tilt away from the market allocation in this case. In that regard it is a pretty active decision.
All of this said, I will agree that this is a very trendy topic at the moment and as a result may be a bad time to actually make these types of adjustments to a portfolio.