Vanguard Int'l Bond--any news?

[monkeyroar]

It's been a while since I've heard anything about the eventual roll-out of Vanguard's two new international bond funds.

https://personal.vanguard.com/us/insigh ... s-01172012

Last I heard they were to introduce them sometime in 2012, but we're already into May. Anybody know anything?

[Angst]

Yes, I'd like an update too. Short of calling Vanguard and asking (anyone tried?), if you click on one of the "COMMENTS" links at that Vanguard web page url in the OP, you can ask all you want about the proposed International Bonds funds without even having to give an email address or sign up or login to anything. I just used it to give my 2 cents. If enough people comment, I expect Vanguard might respond.

[Taylor Larimore]

It's been a while since I've heard anything about the eventual roll-out of Vanguard's two new international bond funds.

https://personal.vanguard.com/us/insigh ... s-01172012

Last I heard they were to introduce them sometime in 2012, but we're already into May. Anybody know anything?

Monkeyroar:

To my knowledge, Vanguard has said very little about when they will roll-out their new international bond funds.

I am anxious to learn more about the funds and their justification in a portfolio.

Best wishes.
Taylor

[555]

I don't think Vanguard is overly enthusiastic about these funds, and they are lukewarm in their description of its place in a portfolio.

In other words, they will provide access to an asset class that some investors want (at a lower cost) but they don't think it's that much needed.

So maybe they're not in that much of a hurry.

[gkaplan]

How does this offering fit into one's fixed income allocation? For example, if one has a 60/40 equity/fixed income allocation, how much of that forty percent should one devote to this international fund?

[ftobin]

How does this offering fit into one's fixed income allocation? For example, if one has a 60/40 equity/fixed income allocation, how much of that forty percent should one devote to this international fund?

Vanguard's paper on international bonds points to 100%, but for some reason they don't follow-through on that, recommending instead 20-40% as a "reasonable starting point".

http://www.vanguard.com/pdf/icrifi.pdf

[G-Money]

How does this offering fit into one's fixed income allocation? For example, if one has a 60/40 equity/fixed income allocation, how much of that forty percent should one devote to this international fund?

Do Bogleheads even agree of how much domestic fixed income should be in nominals vs. TIPS? Or in Treasuries vs. TBM? Or on the stock side, between domestic and international?

To answer your question, Vanguard says to consider adding some. https://advisors.vanguard.com/iwe/pdf/I ... omain=true

The chart in Figure 7 suggests that for a 60/40 portfolio held from 1985 through 2010, you would have had the lowest standard deviation with 30% of your stocks in international, and 100% of your bonds in hedged international.

There have been discussions, and maybe even a poll here about the appropriate allocations to international bonds. There was no concensus. So probably anywhere between 0% and market weight would be fine.

[G-Money]

Interesting.

I nearly deleted my post when I saw ftobin had posted a link to the same Vanguard white paper.

But it's not the exact same white paper.

Ftobin's link goes to a paper dated January 2011. My link goes to a paper with the same title dated March 2012.

The executive summary in ftobin's link says:

For the average investor seeking to minimize volatility in a diversified portfolio, we find that allocating from 20% to 40% of the fixed income portion to international bonds can provide a reasonable balance between diverisifcation and cost, assuming that the currency risk inherent to this asset class is hedged.

The executive summary in my link to the same paper says:

For the average investor seeking to further mitigate volatility in a diversified portfolio, we find that foreign bonds can play such a role, assuming that the currency risk inherent to this asset class is hedged. While there is no optimal allocation for all investors, we show that having some exposure can be better than having none. That said, a home bias in one's bond porfolio may be defensible on grounds other than the pure question of diversification; thus, investors considering international bonds should balance the diversification benefits against both the costs involved and the benefits inherent to preserving a core allocation to the U.S. bond market.

Same paper, apparently revised 14 months later. First, a recommendation of 20%-40%. Now, a long-winded, "maybe consider adding some, but we won't tell you how much" paragraph of CYA.

The take-away? Even if you ask the same person or company "how much should one devote to international bonds?", the answer can change depending on when you ask.

Tread carefully.

[555]

Investors expect Vanguard to provide low cost access to all kinds of asset classes. So Vanguard is responding to that demand.

But they're also candidliy saying you don't really need this, but it's okay to have some.

Another thing is they might be waiting for Europe to settle down before launching.

[ObliviousInvestor]

I asked on twitter if there were any updates to the above-linked article from January and received the following reply:

We plan to introduce these new products when prepared operationally & organizationally. Expect later 2012 or early 2013.

https://twitter.com/#!/Vanguard_Group/s ... 2080975872

[G-Money]

Investors expect Vanguard to provide low cost access to all kinds of asset classes. So Vanguard is responding to that demand.

But they're also candidliy saying you don't really need this, but it's okay to have some.

Another thing is they might be waiting for Europe to settle down before launching.

So why would Vanguard start out making an explicit, concrete AA recommendation, only to backtrack and get all wishy-washy just 14 months later?

[nisiprius]

I wouldn't read too much into this. Getting stuff past the SEC is apparently nontrivial, and it seems to me that in the past there were often yearlong lags between expected introduction dates, e.g. for the Managed Payout funds, and actual availability.

So why would Vanguard start out making an explicit, concrete AA recommendation, only to backtrack and get all wishy-washy just 14 months later?

I admire Vanguard so much that I would entertain the possibility that it's because they are intellectually honest.

The relationship shown in that paper is extremely broad. Looking for an optimum peak in those charts is like trying to find the highest point in Lake Erie. Also, these efficient frontier calculations are notoriously unstable and it's possible that just adding another 14 months of data included a wind seiche that shifted the highest point a hundred miles west.

[G-Money]

So why would Vanguard start out making an explicit, concrete AA recommendation, only to backtrack and get all wishy-washy just 14 months later?

I admire Vanguard so much that I would entertain the possibility that it's because they are intellectually honest.

The relationship shown in that paper is extremely broad. Looking for an optimum peak in those charts is like trying to find the highest point in Lake Erie. Also, these efficient frontier calculations are notoriously unstable and it's possible that just adding another 14 months of data included a wind seiche that shifted the highest point a hundred miles west.

Wouldn't intellectual honesty require Vanguard to explain why they made the change?

Remember, there was no new information discussed in the paper to explain why Vanguard changed it's position. The March 2012 version includes an extra year's worth of data, but the charts in the two versions are indistinguishable.

I don't have any problem with Vanguard (or anyone else, for that matter) changing its mind. I do have a problem with Vanguard going from an explicit AA recommendation to a decidedly nondescript recommendation in different versions of the same paper without any explanation, and without any acknowledgement that Vanguard had, in fact, previously recommended something entirely different.

[555]

It was clear from the paper that there was no strong case made.

[momar]

It was clear from the paper that there was no strong case made.

Right. I recall reading the original paper and thinking "what the heck? who cares?"

[nisiprius]

Wouldn't intellectual honesty require Vanguard to explain why they made the change?

Yes.

[nisiprius]

Link to updated paper. Same list of authors. No time now, someone needs to do a careful side-by-side and see what's changed. My crack about a wind seiche in Lake Erie was off the mark, at first glance Figure 7 is much the same very very gently rolling landscape as before.

[Taylor Larimore]

Bogleheads:

I read the linked Vanguard study. The chart in Figure 6 on page 9 is revealing.

This chart compares U.S. Bonds and (hedged) International Bonds. The two types of bonds have had very similar returns and correlation since 1988 when the chart begins.

I am not yet convinced that the additional cost and complexity of foreign bonds is worthwhile.

https://institutional.vanguard.com/iam/pdf/ICRIFI.pdf

Best wishes.
Taylor

[stratton]

I am not yet convinced that the additional cost and complexity of foreign bonds is worthwhile.

An investor is basically getting yield curve and interest rate diversification.

I can see why Vanguard isn't doing anything right now since the index is ~30% in the Euro which has a few problems right now.

Paul

[mptfan]

Taylor, perhaps you missed the conclusion of that paper...

"Conclusion
International fixed income securities make up a significant portion of the global investable market. While investors in international bonds are exposed
to the risk of interest rate movements, the political landscape, and the economies of many different markets, we’ve shown that the primary factors driving international bond prices are relatively uncorrelated to the same U.S. factors, which implies a diversification benefit. Of course, investors are also exposed to currency movements, which have an important role in determining the risk of international bonds. We’ve shown that on average, the volatility of currencies can overwhelm any diversification benefit that international bonds may bring to a diversified portfolio. On the other hand, with that currency risk hedged, an allocation to international bonds can lead to lower average portfolio volatility over time.
To make the strategic decision to include international bonds in a diversified portfolio, an investor should weigh the trade-offs among several factors: the potential to reduce portfolio volatility, exposure to the largest global asset class, the costs of implementation, and the investor’s own views
on the future path of the U.S. dollar. Based on our findings, we believe that most investors should consider adding hedged foreign bonds to their existing diversified portfolios."

[Taylor Larimore]

mptfan:

Taylor, perhaps you missed the conclusion of that paper...

Nope. I read the Vanguard paper and Conclusion with interest. However, I've learned to never ask my barber if I need a haircut.

Best wishes.
Taylor

[mptfan]

Taylor, you cited the barber, not me. It seems that you have relied on the barber (Vanguard) for guidance on other issues that affect the length of your hair.

[Sammy_M]

Hedged currency exposure seems the only way to go, unless perhaps your equities are US dominated. My equity allocation is 50/50 so don't want more foreign exchange exposure.

Then it seems to come down to the role of bonds in a portfolio and desired exposure to fixed income risk factors:

Credit risk: Some want exposure to credit risk. If so, diversifying globally seems wise. I want as little credit risk as possible (given that my equities are S/V tilted). Despite the S&P downgrade, it's still hard to argue that US treasury bonds aren't the most creditworthy available across the globe.

Interest rate risk: Most want some exposure to term/interest rate risk. Diversifying globally seems wise if it can be done cost effectively. I want very little term risk, and prefer I-Bonds, CDs, ST Bonds, and Stable Value funds.

Conclusion for me: very little interest in Vanguard's Int'l Bond fund whenever it does become available even if the expense ratio is 0.01%. I can see why others might be interested though if they're investment strategies include significant exposure to the above two risks.

[abuss368]

David Swensen has presented a very compelling arguement why International Bonds are not in an investors best interest. I would urge folks to read that section of Unconventional Success for additional information.

Rick Ferri has also noted in a previous posts that based on his contacts (unless I am mistaken), none of the heavy hitters at Vanguard are putting their money into these funds. Rick also explained the high costs of these funds (like International REITs/RE) makes them unattractive. Perhaps Rick can shed some additional light on the matter.

[Sammy_M]

David Swensen has presented a very compelling arguement why International Bonds are not in an investors best interest. I would urge folks to read that section of Unconventional Success for additional information.

Rick Ferri has also noted in a previous posts that based on his contacts (unless I am mistaken), none of the heavy hitters at Vanguard are putting their money into these funds. Rick also explained the high costs of these funds (like International REITs/RE) makes them unattractive. Perhaps Rick can shed some additional light on the matter.

I don't have the book, but am wondering if it refers to International bonds in general, or specifically hedged currency ones.

Either way, costs of course matter a great deal.

[mptfan]

David Swensen has presented a very compelling arguement why International Bonds are not in an investors best interest. I would urge folks to read that section of Unconventional Success for additional information.

I wonder if he would advise a Canadian investor to avoid all U.S. bonds because they are not in the investor's best interest?

[abuss368]

David Swensen has presented a very compelling arguement why International Bonds are not in an investors best interest. I would urge folks to read that section of Unconventional Success for additional information.

Rick Ferri has also noted in a previous posts that based on his contacts (unless I am mistaken), none of the heavy hitters at Vanguard are putting their money into these funds. Rick also explained the high costs of these funds (like International REITs/RE) makes them unattractive. Perhaps Rick can shed some additional light on the matter.

I don't have the book, but am wondering if it refers to International bonds in general, or specifically hedged currency ones.

Either way, costs of course matter a great deal.

While I don't have the book in front of me, and I would have to look up, I believe he was referring to both hedged and unhedged in his writings. Pretty convincing.

Further, if the $22 BILLION endowment at Yale does not include any foreign bonds, what makes all of us, at our "levels" think we "need" them or can do better?

[mptfan]

Further, if the $22 BILLION endowment at Yale does not include any foreign bonds, what makes all of us, at our "levels" think we "need" them or can do better?

This is a straw man argument--I haven't heard anyone say that you "need" foreign bonds.

[Sammy_M]

While I don't have the book in front of me, and I would have to look up, I beleive he was referring to both hedged and unhedged in his writings. Pretty convincing.

I note the distinction Larry Swedroe makes in his book:

Investors seeking the diversification benefits of foreign-currency exposure can obtain those same benefits by investing in International equities that are unhedged for exchange-rate risk. On the fixed income side, investors generally seek stability... Unhedged foreign currency exposure for fixed income investments is not generally recommended.

[systemBuilder]

First of all, John Bogle in his book, "Bogle on Mutual Funds" (1993), explains that he thinks International Bonds are worthless. He's wrong, of course, as he was wrong fairly recently when he predicted 6-8% returns on the stock market in ~2006 (his own formula for predicting future stock returns - from chapter 11 of his book - was predicting 1-2% returns after "reversion to the mean" on p/e ratios, etc.) Sometimes, even John Bogle cannot act rationally.

So I am sure the company is reluctant to issue an international bond portfolio due to some management bias.

And I think that like any wall street firm, they want the security to "pop" when it is issued, i.e. it should have a very good year in the 12 months following its issuance. I have been waiting for Vanguard to issue this security for the past 10 years. They have, irresponsibly, not issued it yet. International Bonds have probably outperformed all other securities (except gold, another security that Vanguard foolishly chooses not to follow - VPMCX went 0% into gold right before the 2007 crisis and nearly wiped out my portfolio.)

Because I have been waiting so long, I decided to invest in the Vanguard Global ex-U.S. Real Estate Index . The returns on this fund should be highly correlated with an International Bond fund, since they are correlated with the ROA on property loans overseas. However, since its inception in 2010, that fund has been a dog, and has returned -0.92% since inception, due to dollar appreciation. So I am certain that dollar appreciation is holding back the issuance of all new Vanguard Global or Vanguard International funds right now - not just the Bonds, but everything.

[abuss368]

First of all, John Bogle in his book, "Bogle on Mutual Funds" (1993), explains that he thinks International Bonds are worthless. He's wrong, of course, as he was wrong fairly recently when he predicted 6-8% returns on the stock market in ~2006 (his own formula for predicting future stock returns - from chapter 11 of his book - was predicting 1-2% returns after "reversion to the mean" on p/e ratios, etc.) Sometimes, even John Bogle cannot act rationally.

So I am sure the company is reluctant to issue an international bond portfolio due to some management bias.

And I think that like any wall street firm, they want the security to "pop" when it is issued, i.e. it should have a very good year in the 12 months following its issuance. I have been waiting for Vanguard to issue this security for the past 10 years. They have, irresponsibly, not issued it yet. International Bonds have probably outperformed all other securities (except gold, another security that Vanguard foolishly chooses not to follow - VPMCX went 0% into gold right before the 2007 crisis and nearly wiped out my portfolio.)

Because I have been waiting so long, I decided to invest in the Vanguard Global ex-U.S. Real Estate Index . The returns on this fund should be highly correlated with an International Bond fund, since they are correlated with the ROA on property loans overseas. However, since its inception in 2010, that fund has been a dog, and has returned -0.92% since inception, due to dollar appreciation. So I am certain that dollar appreciation is holding back the issuance of all new Vanguard Global or Vanguard International funds right now - not just the Bonds, but everything.

This is your first post on a forum dedicated to "investing advice inspired by Jack Bogle".

"He's wrong" and "Sometimes, even John Bogle cannot act rationally."

Seriously?

Mr. Bogle knows more about investing than any of us. I would bet he has forgot more related to investing than most of us will ever know.

Where is the respect for your fellow man?

[Taylor Larimore]

Bogleheads:

It is tempting to clutter a portfolio with unnecessary funds in the hope of higher return or reduced volatility. Only time will tell if the addition of more funds will be worthwhile. The chart in this link gives perspective.

http://chart.apis.google.com/chart?chxt ... dls=000000

Past returns do not guarantee future returns.

Best wishes.
Taylor

[abuss368]

Bogleheads:

It is tempting to clutter a portfolio with unnecessary funds in the hope of higher return or reduced volatility. Only time will tell if the addition of more funds will be worthwhile. The chart in this link gives perspective.

http://chart.apis.google.com/chart?chxt ... dls=000000

Past returns do not guarantee future returns.

Best wishes.
Taylor

Hi Taylor,

Thank you for your response. As it is always said, the numbers never lie.

Kind Regards.

[Alex Frakt]

First of all, John Bogle in his book, "Bogle on Mutual Funds" (1993), explains that he thinks International Bonds are worthless. He's wrong, of course...

No he's not. You apparently just have too narrow a view to understand what he is doing. Yes, from a purely MPT/expected return perspective, the academic community will generally agree that it is advantageous to hold some international bonds if you can find a suitable vehicle. However many investors, Bogle among them, aren't concerned with eking a few basis points of extra returns out of their bond holdings. They use bonds as a safe haven, a way of preserving capital, a hedge against all those risks other than volatility risk. They know the expected returns on high-quality domestic bonds are just slightly above inflation. But they are OK with that.

[yobria]

David Swensen has presented a very compelling arguement why International Bonds are not in an investors best interest. I would urge folks to read that section of Unconventional Success for additional information.

I wonder if he would advise a Canadian investor to avoid all U.S. bonds because they are not in the investor's best interest?

I hope so. No reason for a Canadian investor to take currency risk on the bond side. Canada can print money as well as the US can to repay its debts.

[Valuethinker]

David Swensen has presented a very compelling arguement why International Bonds are not in an investors best interest. I would urge folks to read that section of Unconventional Success for additional information.

I wonder if he would advise a Canadian investor to avoid all U.S. bonds because they are not in the investor's best interest?

I hope so. No reason for a Canadian investor to take currency risk on the bond side. Canada can print money as well as the US can to repay its debts.

For equities, a Canadian investor should diversify: the Canadian stock market is thinly capitalized and not diversified as to type of stocks (financials and resource, primarily) nor to type of companies (the only significant tech stock was RIM).

On bonds, there is limited need to diversify internationally. The US bond market and the Canadian closely track each other. There is a wide range of credits available: 10 Provinces + the Fed, just in the government bond sector (one or two provinces are AAA). The Canadian government bond market is large and liquid. Canada is AAA credit rating and has managed to deal with previous fiscal crises. Most of the provinces have a degree of fiscal sanity.

The diversification gains into other bond markets are relatively limited. Yes you would get currency risk (unless you hedge) and plenty of that. But the real interest rate cycles of Canada are not wildly out of synch with other developed economies-- the degree of macroeconomic convergence with the USA means that the two bond markets tend to move in synch (this credit crunch is anomalous: but what's happened is that Alberta and BC and Saskatchewan have done well out of China and EM, but Ontario and Quebec are getting caned with the US industrial/ automotive recession).

The diversification benefits into overseas bonds are thus fairly limited, and the cost of currency hedging is likely to overreach them.

The diversification I would consider (and Ontario Teachers grabbed just this opportunity-- an $80bn+ pension fund) is out of Canadian Real Return Bonds and into US TIPS (which possess the additional benefit of redeeming at 100 ie deflation protection) if real interest rates on the latter were much higher than the former.

[normaldude]

David Swensen has presented a very compelling arguement why International Bonds are not in an investors best interest. I would urge folks to read that section of Unconventional Success for additional information.

Rick Ferri has also noted in a previous posts that based on his contacts (unless I am mistaken), none of the heavy hitters at Vanguard are putting their money into these funds. Rick also explained the high costs of these funds (like International REITs/RE) makes them unattractive. Perhaps Rick can shed some additional light on the matter.

John Bogle, founder of Vanguard, recommends holding a foreign bond fund. I consider him to be a heavy hitter.



http://money.cnn.com/2004/02/19/magazin ... olio_0403/

I think it's best to be diversified. If US government defaults, and the global economy goes into a long severe recession, then foreign bonds are one of the few things that will do well, as the flight to quality moves to a new safe haven. It's all about diversification.

[claimui]

I think it's best to be diversified. If US government defaults, and the global economy goes into a long severe recession, then foreign bonds are one of the few things that will do well, as the flight to quality moves to a new safe haven. It's all about diversification.

The US government literally prints money. Defaults are not really the problem; instead it is more the risk of your money becoming worthless and/or being stuck with low interest rates.

VBMFX's NAV has risen to all time highs and its yield has dropped to 1.71%. I am still holding it but this is primarily for lack of better options from Vanguard. IMO, as US bond yields get closer and closer to zero, they are becoming more about speculation than investment. PIMCO's foreign bond funds are yielding closer to 3% (more for emerging market bonds) and I think those make much more sense as an investment right now.

[Valuethinker]

I think it's best to be diversified. If US government defaults, and the global economy goes into a long severe recession, then foreign bonds are one of the few things that will do well, as the flight to quality moves to a new safe haven. It's all about diversification.

If the US government defaults then we have a 6 sigma event. Financial markets globally would go into a meltdown, liquidity would just dry up.

(you would have a constitutional problem as well but perhaps the Supreme Court could be persuaded that that ammendment does not hold?)

Your problem would be that access to non USD accounts and investments would almost certainly be restricted. That is the pattern of major defaults the world over.

So if you own those funds via an offshore account, not known to the IRS (and believe me, the amount of paperwork I sign that says I am *not* a US citizen or taxpayer makes me think such are hard to open) then yes they should be safe.

You would in such a scenario need 1). safe offshore bank accounts 2). hard assets like food, ammunition, razor blades, coffee, batteries-- things that would be hard to get in such a scenario 3). probably gold. The last time US went through such a situation, to my knowledge, was during the collapse of the Confederate States of America (and in the CSA not the US as a whole). There could be Bushwackers again (irregular deserters from both sides, forming criminal bands).

What would happen to the bonds of countries like Canada & Australia if the US defaults is an interesting question-- go down with it, I would suspect. Ditto many financial institutions, globally. We would retreat (as the world did in the 30s) to a series of controlled trading/ currency blocs (autarky)-- British Empire, Japan, Germany etc.

What you are really guarding against here is:

- the US manages to have an inflation rate very different from the world (hard to see since roughly 40% of world GDP is dollar linked-- think Mexico and Canada as well, plus Carribean, the oil exporting countries etc.) and the USD plummets relative to world currencies in general

- the US government prints money to avoid default (ditto on the currency)

So yes, foreign bonds would do well. Something similar happened in the 1970s when the DM, Yen and CHF soared against the USD.

That is primarily a currency bet, though, rather than a bond bet per se. Note many overseas bond funds hedge currency exposure, so you are not protected against a major USD devaluation (nor hurt by an appreciation).

It seems, for most US based Bogleheads, that you are better to get that currency exposure via equity funds rather than bond funds.

A US TIPS fund should provide a greater degree of protection against US inflation than a foreign bond fund.

[yobria]

David Swensen has presented a very compelling arguement why International Bonds are not in an investors best interest. I would urge folks to read that section of Unconventional Success for additional information.

I wonder if he would advise a Canadian investor to avoid all U.S. bonds because they are not in the investor's best interest?

I hope so. No reason for a Canadian investor to take currency risk on the bond side. Canada can print money as well as the US can to repay its debts.

For equities, a Canadian investor should diversify: the Canadian stock market is thinly capitalized and not diversified as to type of stocks (financials and resource, primarily) nor to type of companies (the only significant tech stock was RIM).

On bonds, there is limited need to diversify internationally...

Right, exactly. It's important to understand the concepts behind diversification, so we know, for example, when we don't need to do it. I would consider US bonds if there were a large (real) interest rate differential, but this is an unlikely situation.

[mptfan]

When you ask someone who espouses total market weights of the U.S. equity market as the optimum asset allocation if they also follow U.S. Bond market weight allocations, they say "No, that's different." When you ask if they also follow world equity market allocations, they say "No, that's different." When you ask if they also follow world bond market allocations, they say "No, that's different."

I have heard every justification for these inconsistencies, and while I do see some logic to support the bias against market weight world equity diversification (I don't agree with it, but I can at least see some of the logic), I think that some who espouse U.S. total market weight allocations as the holy grail are being inconsistent and biased.

[normaldude]

I think it's best to be diversified. If US government defaults, and the global economy goes into a long severe recession, then foreign bonds are one of the few things that will do well, as the flight to quality moves to a new safe haven. It's all about diversification.

The US government literally prints money. Defaults are not really the problem

Lots of countries print money, and still default. Russia in 1998. Argentina in 2002.

http://en.wikipedia.org/wiki/Sovereign_ ... tructuring

I'd rather be diversified.

[normaldude]

What would happen to the bonds of countries like Canada & Australia if the US defaults is an interesting question-- go down with it, I would suspect.

Historically, flight to quality has been to the safe haven of US bonds. In my scenario (US government defaults, and the global economy goes into a long severe recession), the flight to quality would be away from US bonds (relative to the past), unless 100% of countries in the world simultaneously defaulted.

Either way, we're guessing. Which is why I'd rather be diversified.

[jginseattle]

David Swensen has presented a very compelling arguement why International Bonds are not in an investors best interest. I would urge folks to read that section of Unconventional Success for additional information.

Rick Ferri has also noted in a previous posts that based on his contacts (unless I am mistaken), none of the heavy hitters at Vanguard are putting their money into these funds. Rick also explained the high costs of these funds (like International REITs/RE) makes them unattractive. Perhaps Rick can shed some additional light on the matter.

Mr. Swensen also argues against tax-free municipal bonds, corporate bonds, Mortgage-Backed Securities, asset-backed securities, hedge funds and venture capital for individual investors.

[abuss368]

David Swensen has presented a very compelling arguement why International Bonds are not in an investors best interest. I would urge folks to read that section of Unconventional Success for additional information.

Rick Ferri has also noted in a previous posts that based on his contacts (unless I am mistaken), none of the heavy hitters at Vanguard are putting their money into these funds. Rick also explained the high costs of these funds (like International REITs/RE) makes them unattractive. Perhaps Rick can shed some additional light on the matter.

Mr. Swensen also argues against tax-free municipal bonds, corporate bonds, Mortgage-Backed Securities, asset-backed securities, hedge funds and venture capital for individual investors.

Implying?

[HanSolo]

Hello, I would like to add my two cents on this topic (and this is my first post on Bogleheads).

As we see in this thread, there are many opinions about whether international bonds (or any asset class) are "right" or "wrong" for the average investor. I see it as a personal preference. Some people use a two-fund or three-fund portfolio, and some don't. Some people augment such portfolios with REITs or TIPS (or munis, or GNMAs, etc.), and some don't. I think that's fine. And international bonds are just another asset class that people can choose to include, or not. I don't see it as being right or wrong either way.

My preference is to include international bonds, unhedged. My rationale is that currency diversification mitigates the risk of having all of one's fixed-income "eggs" in one basket (the US Dollar basket). Considering that currency devaluation is not just a risk, but an ongoing reality (it is often said that the USD has been devalued by 98% over the past 100 years), the question is whether we may face a more rapid devaluation in the future. There are some fairly smart people out there who are saying that the risk of this is increasing, considering the growing fiscal imbalances and other issues, and that increased "money printing" will be the path of least resistance. Of course, other currencies could be devalued as well, and we can't know who will win the "competitive devaluation" game, if that's what it is. So I diversify because I don't know that any particular currency will be stable over time, and I'm not sure I want to put all my fixed-income "eggs" in the USD basket.

I can understand and appreciate the opposing rationale, that unhedged currency exposure increases "foreign currency risk". I just see it as two opposite kinds of risk ("foreign currency risk" being the risk that foreign currencies are weak or volatile against the USD, and "USD devaluation risk" being the risk that the USD is devalued more than other currencies over time). I think that everyone is entitled to choose which risks they want to consider in their portfolio construction, and any of these choices are perfectly valid. My choice is to mitigate, to some degree, the "USD devaluation risk" by including unhedged foreign bonds. That being said, domestic bonds are still the majority of my fixed-income portfolio.

I've seen the argument that "if you plan to eventually spend your money in the US, then you may as well have all your low-risk money (bonds) in USD". That's fine, but I'm not totally sure I'll be living in the US or somewhere else, say, after retirement. And even if I stay in the US, considering that this is a global economy, we may be spending in dollars but we are buying things that come from everywhere (i.e., even though we don't see the currency conversion when we buy things at Walmart, the conversion does happen somewhere along the way in the supply chain).

Some have pointed out that you can get foreign currency exposure by investing in unhedged international stock funds (such as Vanguard Total International), not to mention US-based multinational companies who sell stuff overseas. That's also fine. In my case, my preferred asset allocation is a majority of fixed income, and I don't want to add more on the equity side (which already includes some international). So the international bond fund allows me to get more foreign currency exposure without adding more equities.

Given my rationale, if Vanguard offers international bond funds that are hedged, then I probably won't use them.

It was interesting to see, in the post from Normaldude, that Mr. Bogle also advocated using a foreign bond fund at one point. Unfortunately, the article did not indicate whether the fund was hedged or unhedged (Pimco has both kinds, both of which have a "class D"). In general, I agree with Normaldude's post, except that I'm more concerned about a US devaluation than an outright default. But I'm not going overboard on that concern. My foreign bond exposure is right around Mr. Bogle's recommendation (10%). Not that I have to follow what he outlined, it just happens to be right around there.

I'm sure there are people who disagree with my rationale or choices, and that's fine, I respect that. As I said, everyone chooses what their concerns are, what risks they want to address, and what investments to make. I'm OK with that -- "live and let live."

Peace, and best wishes.

[abuss368]

Hello, I would like to add my two cents on this topic (and this is my first post on Bogleheads).

As we see in this thread, there are many opinions about whether international bonds (or any asset class) are "right" or "wrong" for the average investor. I see it as a personal preference. Some people use a two-fund or three-fund portfolio, and some don't. Some people augment such portfolios with REITs or TIPS (or munis, or GNMAs, etc.), and some don't. I think that's fine. And international bonds are just another asset class that people can choose to include, or not. I don't see it as being right or wrong either way.

My preference is to include international bonds, unhedged. My rationale is that currency diversification mitigates the risk of having all of one's fixed-income "eggs" in one basket (the US Dollar basket). Considering that currency devaluation is not just a risk, but an ongoing reality (it is often said that the USD has been devalued by 98% over the past 100 years), the question is whether we may face a more rapid devaluation in the future. There are some fairly smart people out there who are saying that the risk of this is increasing, considering the growing fiscal imbalances and other issues, and that increased "money printing" will be the path of least resistance. Of course, other currencies could be devalued as well, and we can't know who will win the "competitive devaluation" game, if that's what it is. So I diversify because I don't know that any particular currency will be stable over time, and I'm not sure I want to put all my fixed-income "eggs" in the USD basket.

I can understand and appreciate the opposing rationale, that unhedged currency exposure increases "foreign currency risk". I just see it as two opposite kinds of risk ("foreign currency risk" being the risk that foreign currencies are weak or volatile against the USD, and "USD devaluation risk" being the risk that the USD is devalued more than other currencies over time). I think that everyone is entitled to choose which risks they want to consider in their portfolio construction, and any of these choices are perfectly valid. My choice is to mitigate, to some degree, the "USD devaluation risk" by including unhedged foreign bonds. That being said, domestic bonds are still the majority of my fixed-income portfolio.

I've seen the argument that "if you plan to eventually spend your money in the US, then you may as well have all your low-risk money (bonds) in USD". That's fine, but I'm not totally sure I'll be living in the US or somewhere else, say, after retirement. And even if I stay in the US, considering that this is a global economy, we may be spending in dollars but we are buying things that come from everywhere (i.e., even though we don't see the currency conversion when we buy things at Walmart, the conversion does happen somewhere along the way in the supply chain).

Some have pointed out that you can get foreign currency exposure by investing in unhedged international stock funds (such as Vanguard Total International), not to mention US-based multinational companies who sell stuff overseas. That's also fine. In my case, my preferred asset allocation is a majority of fixed income, and I don't want to add more on the equity side (which already includes some international). So the international bond fund allows me to get more foreign currency exposure without adding more equities.

Given my rationale, if Vanguard offers international bond funds that are hedged, then I probably won't use them.

It was interesting to see, in the post from Normaldude, that Mr. Bogle also advocated using a foreign bond fund at one point. Unfortunately, the article did not indicate whether the fund was hedged or unhedged (Pimco has both kinds, both of which have a "class D"). In general, I agree with Normaldude's post, except that I'm more concerned about a US devaluation than an outright default. But I'm not going overboard on that concern. My foreign bond exposure is right around Mr. Bogle's recommendation (10%). Not that I have to follow what he outlined, it just happens to be right around there.

I'm sure there are people who disagree with my rationale or choices, and that's fine, I respect that. As I said, everyone chooses what their concerns are, what risks they want to address, and what investments to make. I'm OK with that -- "live and let live."

Peace, and best wishes.

Hi HanSolo,

Vanguard's international bond fund will be hedged. You can search their website for additional information.

[yobria]

As we see in this thread, there are many opinions about whether international bonds (or any asset class) are "right" or "wrong" for the average investor. I see it as a personal preference. Some people use a two-fund or three-fund portfolio, and some don't. Some people augment such portfolios with REITs or TIPS (or munis, or GNMAs, etc.), and some don't. I think that's fine. And international bonds are just another asset class that people can choose to include, or not. I don't see it as being right or wrong either way.

Certainly true. Much is preference. You just want to be sure your preferences are based on correct understanding. You wouldn't want to overweight REITs in the belief that owning them will make you taller, for example. Looking at yours in this case, I don't agree that endless USD devaluation (in real terms, what matters), is in any way an "ongoing reality". Future currency movements depend on the whims of buyers and sellers in the market (and govt intervention), and are unknowable.

[HanSolo]

Vanguard's international bond fund will be hedged. You can search their website for additional information.

Yes, I see in the white paper that this is their plan. But we won't know for sure what the product is until they actually offer it. Some people (above) were speculating reasons why they might be delaying its introduction. Another reason could be that they're reconsidering what it is they want to offer.

If they wind up offering an unhedged fund, I'll be more likely to consider that. But I'll also be looking at the quality of the fund management relative to the competition (i.e., risk-adjusted performance, which takes time to judge).

I don't agree that endless USD devaluation (in real terms, what matters), is in any way an "ongoing reality". Future currency movements depend on the whims of buyers and sellers in the market (and govt intervention), and are unknowable.

By "ongoing reality" I was referring to the oft-cited observation that the USD has been devalued by 98% over the past 100 years, in a gradual fashion, and the processes that cause that (such as "money printing") are still happening (as I understand). I was not trying to say that I'm basing my investment choices on that observation (or perception, as the case may be). I was trying to say that if there is, in fact, an increasing risk that we could be subjected to a more rapid devaluation than we were in the past (which is a possibility that some very experienced economists have raised), then I may want to take that into account in some fashion (without going overboard). Again, I see it as a personal preference (just as some people like gold, or REITs, and some don't).

Best regards,
Han Solo

[claimui]

PIMCO offers some of their foreign bond funds in both US dollar hedged and unhedged flavors. Some people want the currency exposure and others just want the higher yields and diversification. I don't think it would be too confusing because I think any person who buys foreign bonds would (or should) understand the difference between the two.