International Bonds

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cliff
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International Bonds

Post by cliff » Tue Jun 28, 2016 7:09 pm

I do not hold any international bonds. Nor do I have much knowledge about international bonds.

I am thinking about diversifying by buying some international bonds. I am not trying to be a market timer and this is unrelated to the current international financial issues.

I am looking for opinions on investing in international bonds. Diversification? Risks? Returns? Relationship to interest rates in the US?

Just looking for opinions

lack_ey
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Re: International Bonds

Post by lack_ey » Tue Jun 28, 2016 8:25 pm

With international bonds, other than those already denominated in USD, there's currency risk. You can either hedge it or not hedge it.

If currency unhedged, the short-term volatility of the currency movements swamps out the actual underlying bond return. But there are costs and minor counterparty risk associated with hedging. Overall if you already have a lot of international FX exposure via unhedged international stocks or anything else, you might more strongly consider hedging (using a fund that hedges internally). It's something of an open question, perhaps with less agreement here than for stocks. Some firms do hedge both international stock and bond funds; notably, Vanguard does not currency hedge most of its international stock funds but does hedge its big international bond index fund. Some suggest going all unhedged.

Properties hedged and unhedged will differ. Also, you might split international bonds into government and corporate, as well as developed vs. emerging. EM bonds have more credit risk and are more correlated with stocks.

All in all, given the additional costs for most funds I doubt you'd want to use anything other than Vanguard's hedged fund or maybe one of the ETFs. Vanguard's fund does currency hedging with short-term forward contracts, which means that you do get diversification in interest rates and term structures. Rates across the world are correlated but not at 1.

Currently, rates around the world are largely pretty low and even with some small hedge return (from the US's short-term rates being low but at least higher than in some other places), it doesn't make an incredible amount of sense to pay extra mutual fund fees over a US bond fund to take on the term risk to own a Japanese 10-year government bond yielding -0.23% or a Swiss equivalent at -0.59%, for example.

Over the long run there may be some diversification benefit but it's not looking too hot right now. I mean, if you really want diversification from term risk in your fixed income, you can always use CDs (direct CDs, not brokered, or just savings accounts) instead and not submit yourself to those punishing yields.

Vanguard has a paper justifying their choice:
https://personal.vanguard.com/pdf/icrifi.pdf

There have been many previous discussions, including these:
viewtopic.php?t=183485
viewtopic.php?t=171299

RCL
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Re: International Bonds

Post by RCL » Tue Jun 28, 2016 8:34 pm

lack-ey, with reference to VG's VTABX fund, is this hedged or not hedged? I really can't understand all the lingo to determine if this is a suitable fund for international bond exposure. Thoughts?

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Taylor Larimore
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Re: International Bonds?

Post by Taylor Larimore » Tue Jun 28, 2016 8:49 pm

I am looking for opinions on investing in international bonds. Diversification? Risks? Returns? Relationship to interest rates in the US?

Cliff:

On page 11 (bottom half) of The Three-Fund Portfolio topic, I explained the reasons why I did not add an international bond fund.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Taylor Larimore
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Re: International Bonds?

Post by Taylor Larimore » Tue Jun 28, 2016 8:56 pm

I am looking for opinions on investing in international bonds. Diversification? Risks? Returns? Relationship to interest rates in the US?

Cliff:

On page 11 of The Three-Fund Portfolio topic, I explained the reasons why I did not add an international bond fund. This is a direct link:

viewtopic.php?f=10&t=88005&start=500#p1837043

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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abuss368
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Re: International Bonds

Post by abuss368 » Tue Jun 28, 2016 8:59 pm

cliff wrote:I do not hold any international bonds. Nor do I have much knowledge about international bonds.

I am thinking about diversifying by buying some international bonds. I am not trying to be a market timer and this is unrelated to the current international financial issues.

I am looking for opinions on investing in international bonds. Diversification? Risks? Returns? Relationship to interest rates in the US?

Just looking for opinions


Hi cliff,

I too am learning about this asset class. My understanding is this asset class is now the largest in the world. While I have not read many investment experts recommending this asset class, to put it in perspective, the advice is stale and somewhat out dated. That is, before Vanguard launched their Total International Bond and Emerging Markets Bond funds. Total International Bond Index Fund is fast becoming the second largest bond fund. Vanguard experts, who design the all in one Target and LifeStrategy funds recommend a two fund bond strategy that consists of Total Bond Index and Total International Bond Index.

The problem for us is we will probably add one additional bond fund and I can not get onboard with TIPS which yield next to nothing. No cash flows from dividends. TIPS are only 2% of the bond market.

I think Total market index funds are best. Vanguard recommends Total Stock and Total International Stock and also Total Bond and Total International Bond funds. This is a good approach.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

lack_ey
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Re: International Bonds

Post by lack_ey » Tue Jun 28, 2016 9:34 pm

RCL wrote:lack-ey, with reference to VG's VTABX fund, is this hedged or not hedged? I really can't understand all the lingo to determine if this is a suitable fund for international bond exposure. Thoughts?

This index fund is hedged back to USD by rolling short-term forward contracts, with very little emerging markets, sticking purely to investment grade.

It captures the bulk of the broad ex-US bond market, being market cap weighted (float-adjusted), including sovereign bonds (Treasury equivalents), other government bonds (e.g. from the Province of Alberta), corporate bonds, asset-backed bonds, and the likes. It's primarily sovereign bonds, though. The latest SEC yield after a 0.14% expense ratio was just 0.61% (again, that does not account for the currency hedging), despite higher term risk and credit risk than a standard US total bond market index fund.

As such, it is broad, well diversified, and fairly representative, at a price lower than most others. iShares Core International Aggregate Bond ETF (IAGG) is very similar, including in expense ratio, but is significantly smaller and newer.

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BeBH65
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Re: International Bonds

Post by BeBH65 » Thu Jun 30, 2016 6:00 am

Hello cliff,


cliff wrote:I do not hold any international bonds. Nor do I have much knowledge about international bonds.

I am thinking about diversifying by buying some international bonds.
I am not trying to be a market timer and this is unrelated to the current international financial issues.

I am looking for opinions on investing in international bonds. Diversification? Risks? Returns? Relationship to interest rates in the US?

Just looking for opinions

Some questions to make you reflect:
- What is the role of your current (domestic) bond allocation?
- What would international bonds add to this?
- Why complicate something you understand?

Regards,
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

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abuss368
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Re: International Bonds

Post by abuss368 » Thu Jun 30, 2016 4:29 pm

BeBH65 wrote:Some questions to make you reflect:
- What is the role of your current (domestic) bond allocation?
- What would international bonds add to this?
- Why complicate something you understand?

Regards,


Hi BeBH65,

In my opinion these are very good questions. The role of a bond allocation is to provide safety and income to an investment portfolio. Vanguard investment experts concluded that international bonds (the largest asset class in the world presently) would provide additional diversification from a U.S. only bond market.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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midareff
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Re: International Bonds

Post by midareff » Thu Jun 30, 2016 4:58 pm

abuss368 wrote:
BeBH65 wrote:Some questions to make you reflect:
- What is the role of your current (domestic) bond allocation?
- What would international bonds add to this?
- Why complicate something you understand?

Regards,


Hi BeBH65,

In my opinion these are very good questions. The role of a bond allocation is to provide safety and income to an investment portfolio. Vanguard investment experts concluded that international bonds (the largest asset class in the world presently) would provide additional diversification from a U.S. only bond market.

Best.


Agree with abuss368 on this and find the questions he cited meaningful. I am having a difficult time understanding why adding international bonds would improve my portfolio in beneficial diversification or performance.

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abuss368
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Re: International Bonds

Post by abuss368 » Thu Jun 30, 2016 5:26 pm

midareff wrote:
abuss368 wrote:
BeBH65 wrote:Some questions to make you reflect:
- What is the role of your current (domestic) bond allocation?
- What would international bonds add to this?
- Why complicate something you understand?

Regards,


Hi BeBH65,

In my opinion these are very good questions. The role of a bond allocation is to provide safety and income to an investment portfolio. Vanguard investment experts concluded that international bonds (the largest asset class in the world presently) would provide additional diversification from a U.S. only bond market.

Best.


Agree with abuss368 on this and find the questions he cited meaningful. I am having a difficult time understanding why adding international bonds would improve my portfolio in beneficial diversification or performance.


Are you considering international bonds?
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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abuss368
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Re: International Bonds

Post by abuss368 » Thu Jun 30, 2016 5:43 pm

I believe more and more investors are adding (and may continue to add) international bonds over time.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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midareff
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Re: International Bonds

Post by midareff » Thu Jun 30, 2016 5:58 pm

abuss368 wrote:I believe more and more investors are adding (and may continue to add) international bonds over time.



Which does not make it the right thing to do. Every situation is different.

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abuss368
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Re: International Bonds

Post by abuss368 » Thu Jun 30, 2016 6:19 pm

midareff wrote:
abuss368 wrote:I believe more and more investors are adding (and may continue to add) international bonds over time.



Which does not make it the right thing to do. Every situation is different.


Indeed. What about the Vanguard experts who recommend them and update the target funds?
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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abuss368
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Re: International Bonds

Post by abuss368 » Thu Jun 30, 2016 6:20 pm

midareff wrote:
abuss368 wrote:I believe more and more investors are adding (and may continue to add) international bonds over time.



Which does not make it the right thing to do. Every situation is different.


Indeed. What about the Vanguard experts who recommend them and update the target funds?
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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midareff
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Re: International Bonds

Post by midareff » Thu Jun 30, 2016 6:27 pm

abuss368 wrote:
midareff wrote:
abuss368 wrote:I believe more and more investors are adding (and may continue to add) international bonds over time.



Which does not make it the right thing to do. Every situation is different.


Indeed. What about the Vanguard experts who recommend them and update the target funds?


My investment problems do not include looking for places to invest hundreds of millions or even billions of dollars of customer bond money. If someone recommends you buy negative interest rate bonds because they are in an index, or because they are available will you line up for that as an investment of your hard earned monies? It's nice to think that a fiduciary always has ONLY your best interests at heart but that may be a bit naive, or perhaps you are more of a trusting soul than I am.

So yes, what about the Vanguard experts who recommend them and update the target funds? Apparently they are recommending wide diversification which may be a result of more than just a need to widely diversify. Maybe, maybe not but in any wide diversification there will be some things you are happy with and some that you wish you didn't have. TBM has a total 12 month dividend of about 2.48% vs. 1.5% for International. How seriously should I consider this as a move in an already bad bond return environment?

About 60% of my portfolio is bonds now and I expect to earn some form of real after tax return on that money with a number that has a digit in front of the decimal point. As Desi used to say.. splain me Lucy how this one works.

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abuss368
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Re: International Bonds

Post by abuss368 » Thu Jun 30, 2016 6:49 pm

midareff wrote:
abuss368 wrote:
midareff wrote:
abuss368 wrote:I believe more and more investors are adding (and may continue to add) international bonds over time.



Which does not make it the right thing to do. Every situation is different.


Indeed. What about the Vanguard experts who recommend them and update the target funds?


My investment problems do not include looking for places to invest hundreds of millions or even billions of dollars of customer bond money. If someone recommends you buy negative interest rate bonds because they are in an index, or because they are available will you line up for that as an investment of your hard earned monies? It's nice to think that a fiduciary always has ONLY your best interests at heart but that may be a bit naive, or perhaps you are more of a trusting soul than I am.

So yes, what about the Vanguard experts who recommend them and update the target funds? Apparently they are recommending wide diversification which may be a result of more than just a need to widely diversify. Maybe, maybe not but in any wide diversification there will be some things you are happy with and some that you wish you didn't have. TBM has a total 12 month dividend of about 2.48% vs. 1.5% for International. How seriously should I consider this as a move in an already bad bond return environment?

About 60% of my portfolio is bonds now and I expect to earn some form of real after tax return on that money with a number that has a digit in front of the decimal point. As Desi used to say.. splain me Lucy how this one works.


Do you invest in TIPS too as you mentioned real return?
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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midareff
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Re: International Bonds

Post by midareff » Thu Jun 30, 2016 6:59 pm

abuss368 wrote:
midareff wrote:
abuss368 wrote:
midareff wrote:
abuss368 wrote:I believe more and more investors are adding (and may continue to add) international bonds over time.



Which does not make it the right thing to do. Every situation is different.


Indeed. What about the Vanguard experts who recommend them and update the target funds?


My investment problems do not include looking for places to invest hundreds of millions or even billions of dollars of customer bond money. If someone recommends you buy negative interest rate bonds because they are in an index, or because they are available will you line up for that as an investment of your hard earned monies? It's nice to think that a fiduciary always has ONLY your best interests at heart but that may be a bit naive, or perhaps you are more of a trusting soul than I am.

So yes, what about the Vanguard experts who recommend them and update the target funds? Apparently they are recommending wide diversification which may be a result of more than just a need to widely diversify. Maybe, maybe not but in any wide diversification there will be some things you are happy with and some that you wish you didn't have. TBM has a total 12 month dividend of about 2.48% vs. 1.5% for International. How seriously should I consider this as a move in an already bad bond return environment?

About 60% of my portfolio is bonds now and I expect to earn some form of real after tax return on that money with a number that has a digit in front of the decimal point. As Desi used to say.. splain me Lucy how this one works.


Do you invest in TIPS too as you mentioned real return?


No I don't. At present inflation rates I can do better with other investments and better than 60% of my income stream already has inflation adjustments so I don't see a need.

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abuss368
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Re: International Bonds

Post by abuss368 » Thu Jun 30, 2016 7:46 pm

midareff wrote:
abuss368 wrote:
midareff wrote:
abuss368 wrote:
midareff wrote:

Which does not make it the right thing to do. Every situation is different.


Indeed. What about the Vanguard experts who recommend them and update the target funds?


My investment problems do not include looking for places to invest hundreds of millions or even billions of dollars of customer bond money. If someone recommends you buy negative interest rate bonds because they are in an index, or because they are available will you line up for that as an investment of your hard earned monies? It's nice to think that a fiduciary always has ONLY your best interests at heart but that may be a bit naive, or perhaps you are more of a trusting soul than I am.

So yes, what about the Vanguard experts who recommend them and update the target funds? Apparently they are recommending wide diversification which may be a result of more than just a need to widely diversify. Maybe, maybe not but in any wide diversification there will be some things you are happy with and some that you wish you didn't have. TBM has a total 12 month dividend of about 2.48% vs. 1.5% for International. How seriously should I consider this as a move in an already bad bond return environment?

About 60% of my portfolio is bonds now and I expect to earn some form of real after tax return on that money with a number that has a digit in front of the decimal point. As Desi used to say.. splain me Lucy how this one works.


Do you invest in TIPS too as you mentioned real return?


No I don't. At present inflation rates I can do better with other investments and better than 60% of my income stream already has inflation adjustments so I don't see a need.


Thanks. Makes sense that you have a very reasonable amount of inflation protection.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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