Who Believes in International Bonds and Why

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SpideyIndexer
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Who Believes in International Bonds and Why

Post by SpideyIndexer » Fri Sep 25, 2015 11:46 am

There has been quite a bit of discussion on why international fixed income is not a good idea. I was curious about whether there are folks out there who do believe in holding large percentage of international fixed income as Vanguard advocates. Please post if you are one and mention your reasons. If you are a naysayer, you are already well represented in several threads already.

I bought a little bit of Vanguard Total International Bond Market (VTABX} when the fund was started but it is a small portion of my holdings. In its short life, VTABX has been appreciating in value significantly more than total bond market. I don't quite understand the reasons. SEC yield of VTABX is about half that of total bond mkt.

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Re: Who Believes in International Bonds and Why

Post by jhawktx » Fri Sep 25, 2015 11:56 am

Well, you bought some so you must believe in them. Tell us why you believe in them.

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Re: Who Believes in International Bonds and Why

Post by SpideyIndexer » Fri Sep 25, 2015 12:00 pm

At the time I bought them I was much less savvy about investing and took Vanguard's word for it. But I starting by dipping my toe in the water, intending to invest more down the road. Now I am not so sure. I was curious whether there are any firm believers in international bonds that we haven't yet heard from.

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Re: Who Believes in International Bonds and Why

Post by vitaflo » Fri Sep 25, 2015 12:03 pm

"Believe" is a slightly weird term to use, but I certainly have them in my portfolio and like them. I like diversification, especially with an asset class as large as international bonds. I think one has to take into account the risks (currency, quality, etc) compared to TBM, which is why I wouldn't go 50/50 on them, but I am at the 70/30 that Vanguard recommends currently and am perfectly happy with it.

I do think the wrong reason to use them is in an attempt to chase returns. To me it's more about diversifying, correlation, and taking the market return. Adding in Int Bonds simply gives you more exposure to the overall market (good or bad, but I'm not picking sides, that's the point).

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Re: Who Believes in International Bonds and Why

Post by SpideyIndexer » Fri Sep 25, 2015 12:24 pm

Vitaflo, that makes sense to me. Since you are 70/30, I am correct that you don't add a holding in high yield bonds such that you own the complete bond market? Rick Ferri had made this case for owning high yield.

I'm not trying to chase yield in bonds, just trying to avoid making any mistakes. I see bonds as mainly smoothing out the rough ride of equities.

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Re: Who Believes in International Bonds and Why

Post by alex_686 » Fri Sep 25, 2015 12:39 pm

vitaflo wrote:"I think one has to take into account the risks (currency, quality, etc) compared to TBM ....
Vanguard Total International Bond Index hedges its FX exposure, so little risk there. I think that is one of the compelling reasons to invest, in theory. If one can get higher returns overseas without any FX exposure then why would you not? Not sure at this point if overseas is offering better rates than the US today, but that is because I am not following the spread between the 2 at this time. I have done so in the past.
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Re: Who Believes in International Bonds and Why

Post by vitaflo » Fri Sep 25, 2015 12:40 pm

SpideyIndexer wrote:Vitaflo, that makes sense to me. Since you are 70/30, I am correct that you don't add a holding in high yield bonds such that you own the complete bond market?
I do not add high yield bond holdings no. I'm not trying to build the perfect complete market portfolio, I'm simply trying to make sure I have exposure to the largest parts and then I call it "good enough". International Bonds make up about 60% of all bonds. They are the worlds largest asset class. Something that big I feel I should have exposure to. That's about all there is to it.

Sounds boring, but Bogleheadism should be boring.

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Re: Who Believes in International Bonds and Why

Post by MrMatt2532 » Fri Sep 25, 2015 12:58 pm

Consider that bond returns can roughly be explained by two risk factors: term risk and default risk. This can give you insight as to whether or not you should be holding international bonds.

For somebody that is only interested in exposing themselves to term risk, or near zero default risk, you would own treasuries. In this case, I see no advantage to owning international bonds.

However, if you thought default risk in bonds was worth taking, it may make sense to diversity into international bonds. Here, matching stock exposure (or maybe a little bit less in international bonds) seems reasonable.

Personally, I fall into camp 1, so no international bonds for me.

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Re: Who Believes in International Bonds and Why

Post by Rx 4 investing » Fri Sep 25, 2015 1:06 pm

If you own an international bond fund, and it is uncoupled from a "fund of funds", (Life Strategy, Target Retirement, etc), there is rationale for reducing exposure. It's especially true if you have enjoyed some decent appreciation. Why?

U.S. treasury bond rates are higher than those of major foreign markets. Foreign central banks have already gone down the path of trashing their currencies to stimulate export growth. The $USD has already strengthened considerably vs. those foreign currencies as a result. Janet Yellen is talking about raising short-term rates based on her notion the US is farther along in our economic recovery from the crash in '08. Raising short-term rates will cause an additional strengthening of the US dollar.

Global capital flows to where it can get the highest yields. This is especially true when the higher yielding bonds are based in a currency that is appreciating relative to their home currency. And the US inflation rate is trending below the Fed's 2% target. It just doesn't get much better than that in the eyes of foreign investors.

Food for thought...

Why should US interest rates be so much higher than the rest of the world's largest economies, esp. if our currency is the strongest ? What will happen to bond yields when foreign buyers bid up the price of US treasury bonds? The US yields will go down. Long-term US treasury bond yields in the US could decline into the range of 1.35% - 1.37% . Far fetched you say? Then why are those the thirty-year yields in the Japanese and German economies, respectively?

With the US inflation rate running Y-o-Y at 0.2%, time is running out to capture these high US yields. If by some stretch of the imagination an investor thinks the US 10 year T-bond should be at 4% based on the current state of the US economy, and anemic inflation, then he/she has no business investing in US stocks or bonds. Instead they should a year's supply of bottled water, canned food, and go down into a bomb shelter . Because with a US 10 year at 4%, all hell will break lose in the stock and bond markets.

IMO: Time to bring international bond money home. That's what I've done. Good luck with your decision !
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Re: Who Believes in International Bonds and Why

Post by cfs » Fri Sep 25, 2015 1:13 pm

Just for the fun of it

Read it on the board -- "International stocks . . . where money goes to die. . ." [replace stocks with bonds]
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Re: Who Believes in International Bonds and Why

Post by grog » Fri Sep 25, 2015 1:41 pm

If I completely lost confidence in the USD I would consider buying unhedged foreign government bonds in a currency I had more faith in. But I feel like we're a long way from that.

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Re: Who Believes in International Bonds and Why

Post by toto238 » Fri Sep 25, 2015 1:50 pm

International Bonds will do different things at different times than Domestic Bonds. That's why. If there's an increase in interest rates in the US, there might not be one internationally. So while that interest rate risk hurt your bonds domestically, your international may be unaffected. Its the same vice versa.

Overall, both are expected to yield a positive return over the long term.

I don't know if I believe in hedging the currency risk when it comes to international bonds. Whether its worth the tradeoff in return, I just don't know.

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Re: Who Believes in International Bonds and Why

Post by nisiprius » Fri Sep 25, 2015 2:03 pm

I believe that (currency-hedged, intermediate-term, investment-grade) international bonds (like Vanguards' VTABX) are mostly harmless. If that constitutes "believing in them," I believe in them.

If "believing in them" means "investing in them," no, I don't do that. I have a high threshold of resistance of fiddling.

I think international bonds are not detectably better or worse than any of a huge number of reasonable things one might do.
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Re: Who Believes in International Bonds and Why

Post by alex_686 » Fri Sep 25, 2015 2:31 pm

toto238 wrote:I don't know if I believe in hedging the currency risk when it comes to international bonds. Whether its worth the tradeoff in return, I just don't know.
If it helps, there is almost zero cost in FX hedging for bonds. Since that is true, why not? In bonds there is not much upside in exposing yourself to FX risk unless one has a specific idea on where FX rates are going - that is unless one is trying to time the market. Since Bogleheads tend not to time this is almost a non-point.
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Re: Who Believes in International Bonds and Why

Post by patrick013 » Fri Sep 25, 2015 2:58 pm

toto238 wrote:International Bonds will do different things at different times than Domestic Bonds.
I have never seen an Int'l bond fund beat a domestic bond fund so I was
a bit surprised at Total Int'l Bond returns. Just can't seem to get the
right methodology to do so, although the IQ to do so hypothetically
exists.

So if I hold Emerging Market bonds I reap some advantage but if I buy
Emerging Market bonds I do not, with a rising interest rate. No wonder
Int'l bond fund managers have trouble beating US bond funds.

I feel anything less than a positive sloping yield curve in the US bond market
is due to cause adverse effects any way you could look at it.
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Re: Who Believes in International Bonds and Why

Post by lee1026 » Fri Sep 25, 2015 3:19 pm

U.S. treasury bond rates are higher than those of major foreign markets. Foreign central banks have already gone down the path of trashing their currencies to stimulate export growth. The $USD has already strengthened considerably vs. those foreign currencies as a result. Janet Yellen is talking about raising short-term rates based on her notion the US is farther along in our economic recovery from the crash in '08. Raising short-term rates will cause an additional strengthening of the US dollar.
The bond funds that people are talking about are all currency hedged. Why are you even talking about currencies here?
With the US inflation rate running Y-o-Y at 0.2%, time is running out to capture these high US yields. If by some stretch of the imagination an investor thinks the US 10 year T-bond should be at 4% based on the current state of the US economy, and anemic inflation, then he/she has no business investing in US stocks or bonds. Instead they should a year's supply of bottled water, canned food, and go down into a bomb shelter . Because with a US 10 year at 4%, all hell will break lose in the stock and bond markets.
Eyeballing the interest rate futures market, the market basically expect the 10 year to be at around 4% in a few years. If you think that the market is insane, you know what to do.

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Re: Who Believes in International Bonds and Why

Post by alex_686 » Fri Sep 25, 2015 3:58 pm

lee1026 wrote:Eyeballing the interest rate futures market, the market basically expect the 10 year to be at around 4% in a few years. If you think that the market is insane, you know what to do.
If I understand the No Arbitrage Pricing Theory of Futures, futures don't tells us the price of something in the future - it tells us what the current yield curve is. Or am I missing something here? What data and calculations are you using?
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Re: Who Believes in International Bonds and Why

Post by lee1026 » Fri Sep 25, 2015 4:24 pm

If I understand the No Arbitrage Pricing Theory of Futures, futures don't tells us the price of something in the future - it tells us what the current yield curve is. Or am I missing something here? What data and calculations are you using?
Yes, the market tells us what the current yield curve looks like. Basically, if you buy a set of Eurodollar futures today, and it turns that the 10 year yield less than around ~3.5% 5 years in the future, you will make money.

Now, I did buy Eurodollar futures, so I agree with you that it is quite likely the 10 year will be lower than 3.5% 5 years in the future, but I think there is a chance that I can lose money on this bet.

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Re: Who Believes in International Bonds and Why

Post by Rx 4 investing » Fri Sep 25, 2015 4:26 pm

Lee1026 asked: "The bond funds that people are talking about are all currency hedged. Why are you even talking about currencies here?"
"Beggar thy nation" policies (trashing value of currencies to stimulate exports) leads to de-flation. The strong US dollar will have greater purchasing power for our imports, and this will put downward pressure on US prices and inflation.
Lee1026 wrote: "Eyeballing the interest rate futures market, the market basically expect the 10 year to be at around 4% in a few years. If you think that the market is insane, you know what to do."
In a new paper by the SF Fed (link), they found "the market" is a very poor predictor of inflation. They concluded: "Interestingly, a simple constant inflation rate corresponding to the Federal Reserve’s 2% inflation target consistently performs best. "

The US inflation rate of change (Y-o-Y) is currently running at +0.2%, and core inflation is running around +1.8%. US core inflation is running below the Fed's 2% target. If we apply the SF Fed's findings, then we can simply extrapolate a 2% (or less) inflation rate for the next few years.

http://www.frbsf.org/economic-research/ ... e-methods/

For consideration...

In the final analysis, long treasury rates (30 year) are a function of inflationary expectations. The Fisher equation (link) states that the real rate equals the nominal rate minus inflationary expectations. So if inflationary expectations are 2% or lower for the 1-2 years, there is simply a very low probability that the 30 year T-Bond will be yielding 6%, and a 10 year T-Bond will be yielding 4%.

Backgrounder on Fisher equation: https://en.wikipedia.org/wiki/Fisher_equation

Yes, I think the "futures market" is insane, and I have laddered my bond durations accordingly. (until of course, they announce 'QE 4' or start dropping money out of helicopters.) :happy

Since the 1950's, the 30 year long-bond has tracked inflationary expectations about 80% of the time (chart). Good luck out there!

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Re: Who Believes in International Bonds and Why

Post by alex_686 » Fri Sep 25, 2015 5:00 pm

lee1026 wrote:
If I understand the No Arbitrage Pricing Theory of Futures, futures don't tells us the price of something in the future - it tells us what the current yield curve is. Or am I missing something here? What data and calculations are you using?
Yes, the market tells us what the current yield curve looks like. Basically, if you buy a set of Eurodollar futures today, and it turns that the 10 year yield less than around ~3.5% 5 years in the future, you will make money.

Now, I did buy Eurodollar futures, so I agree with you that it is quite likely the 10 year will be lower than 3.5% 5 years in the future, but I think there is a chance that I can lose money on this bet.
Can you tell me which Eurodollar future you are looking at? Exchange and expiration.

I ask because the current 10 year Treasury is about 2.1. They carry for a 10 year treasury for 5 years is about 1.5%. At a glance, the higher price just seems to be the normal price of carry. The price of all futures, ignoring storage, lease, and convenience costs, raise steadily upwards.
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Re: Who Believes in International Bonds and Why

Post by patrick013 » Fri Sep 25, 2015 5:03 pm

Regardless of the interest rate or individual study if the consumer
cannot observe the liquidity-preference-theory in daily market
activities the market is in disequilibrium.

Speculation, over-investment, even a waste of resources in production
and distribution, all signs of false economic metrics. The cheap
cost-of-capital has no benefit.

If not corrected by market movements rate setting isn't a bad call for
the day.

If int'l countries set their rates at 1% or 15% why should US internal
money supply and costs per unit of domestic necessities be somehow
adversely affected ?

I beleive in international bonds today but only in the highest paying
countries. Say Brazil, 15% coupon.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Who Believes in International Bonds and Why

Post by bpp » Fri Sep 25, 2015 10:47 pm

I believe unhedged foreign bonds are a high-volatility, low (but positive) expected return asset class that has different risk factors from domestic bonds, domestic stocks and foreign stocks. So I include them.

Though I don't think they will make much difference one way or the other.

For a US-based investor, see Figure 4 of the (in)famous Vanguard paper on foreign bonds: http://www.vanguard.com/pdf/icrifi.pdf
For a 60/40 stock/bond portfolio with the stocks split 50/50 domestic/foreign, then increasing the bond allocation from 100% domestic to 50/50 domestic/foreign (unhedged) only changes the volatility from 9.6% to 10.0%. I.e., it is a negligible change. (And it is even smaller if one's foreign stock percentage is lower.)

For a Japan-based investor, the difference is shown in the difference between the green and yellow lines:
Image

Again, it is negligible.

So, purely from consideration of volatility, it makes virtually no difference whatsoever whether one puts some of one's bond allocation into unhedged foreign bonds or not. It just does not matter. (And hedged foreign bonds would make even less difference.)

Personally, I like diversification for diversification's sake because I'm terrible at predicting the future, so I include unhedged foreign bonds.
If one doesn't like them for whatever reason, then don't include them.
It's that simple.

(And as usual, because it makes so little difference either way, this is an argument that will probably never die.)

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Re: Who Believes in International Bonds and Why

Post by vitaflo » Sat Sep 26, 2015 1:39 pm

bpp wrote: So, purely from consideration of volatility, it makes virtually no difference whatsoever whether one puts some of one's bond allocation into unhedged foreign bonds or not. It just does not matter.

(And as usual, because it makes so little difference either way, this is an argument that will probably never die.)
I actually think this proves the argument in favor of adding them. If it makes no difference, then there is no reason not to add them. Of course, some day it may actually make a difference and then you're holding them. I see it as insurance in case something drastically goes wrong in the US (same with my foreign stock holdings). And if nothing goes wrong I'm no worse off because "it makes no difference".

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Re: Who Believes in International Bonds and Why

Post by steve roy » Sat Sep 26, 2015 1:57 pm

Me, I take my foreign exposure on the equity side. I see no reason for foreign bond holdings. U.S. bonds for me, with a large dollop of international stocks, both small and large cap.

(Adding, I have a wee bit of foreign bonds via Vanguard's Target Date 2015, but at some point I'll bail out of that and go to individual funds. I have no interest in hedging foreign stocks and bonds. Vanguard's foreign bonds are hedged, while their foreign equities are not.)

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Re: Who Believes in International Bonds and Why

Post by patrick013 » Sat Sep 26, 2015 5:00 pm

Read an article today where Emerging Market bonds were
recommended for future investment with the exception of
1 or 2 countries. The article was further qualified by
"be careful" which I assume means limit AA and term.

Going to reread the article tomorrow.
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Re: Who Believes in International Bonds and Why

Post by gkaplan » Sat Sep 26, 2015 5:03 pm

SpideyIndexer wrote:There has been quite a bit of discussion on why international fixed income is not a good idea. I was curious about whether there are folks out there who do believe in holding large percentage of international fixed income as Vanguard advocates....

I don't think Vanguard advocates holding a large percentage of international fixed income.
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Re: Who Believes in International Bonds and Why

Post by lack_ey » Sat Sep 26, 2015 5:11 pm

gkaplan wrote:
SpideyIndexer wrote:There has been quite a bit of discussion on why international fixed income is not a good idea. I was curious about whether there are folks out there who do believe in holding large percentage of international fixed income as Vanguard advocates....

I don't think Vanguard advocates holding a large percentage of international fixed income.
Their general recommendation is now 30% of total fixed income (up from 20% as recently as earlier this year). I don't know if you consider that large or not.

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Re: Who Believes in International Bonds and Why

Post by Rx 4 investing » Sat Sep 26, 2015 5:13 pm

"...if you have bonds in an IRA just keeping the international (bonds) about 30 percent, that’s what we have found to be the best risk/return trade off. We actually increased it just recently. We were at 20 percent, but because of reductions in costs, better transparency in governments, and the debt that’s out there, we felt comfortable increasing the amount to 30 percent. " per Chuck Riley, Vanguard.com, posted on 9-15-15

https://advisors.vanguard.com/VGApp/iip ... EWIR092115
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Re: Who Believes in International Bonds and Why

Post by galeno » Sat Sep 26, 2015 5:49 pm

For those who count their money in USD, non-USD bonds are a mistake. BND vs BNDX. Lower yield. Longer duration. Currency risk which is not desirable in a fixed income allocation.
USA-NRA. TER = 0.28%. Expected real CAGR = 2.00%. AWR = 4.00%.: Port: 50% World Stocks + 15% TIPS + 15% Corps + 15% US Treas + 5% CASH.

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Re: Who Believes in International Bonds and Why

Post by nisiprius » Sun Sep 27, 2015 8:45 am

galeno wrote:For those who count their money in USD, non-USD bonds are a mistake. BND vs BNDX. Lower yield. Longer duration. Currency risk which is not desirable in a fixed income allocation.
I repeat, I don't personally use this fund and don't intend to.

But it's currency-hedged so there should not be (much?) currency risk. It's a nice plain old boring bond fund. I'm not afraid of it, it's one of any number of "perfectly cromulent" bond funds you could choose, I just don't have any personal conviction in it and probably couldn't stay the course in it when the other side of diversification, underperformance, shows up.

Since inception it has outperformed Total Bond nicely since inception, which make me think that the currency hedging must be working. To the eyeball, it hasn't had more risk in the sense of wider fluctuations or sudden surprises. For comparison, look at Templeton Global Bond (TPINX), an aggressive and unhedged "bond" fund that is not "bond-like" at all.

Source: Morningstar

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Re: Who Believes in International Bonds and Why

Post by MnD » Sun Sep 27, 2015 9:27 am

Not only do I don't believe in US-only bond investing I don't support market-cap indexing.
The biggest debtor phenomena does not support directing the biggest chunk of my fixed income investments to it.
I pair a stable value fund currently at 2.125% with an actively managed global bond fund currently at 3.17% yield and duration 3.5 years.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

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Re: Who Believes in International Bonds and Why

Post by stemikger » Sun Sep 27, 2015 9:31 am

I try not to to read the other replies when responding, so forgive me if this was covered.

I don't believe in international bonds because IMHO it is just something one fund company does and the others have to offer it. It is just marketing and will not add value. Did we need it a few years back before anyone offered it?

I don't believe in international stocks because of the conclusion I came to after reading Common Sense on Mutual Funds by John Bogle. His argument that it is not needed makes perfect sense and I never held it and never missed it. Over 20 years and I never felt it belonged in my portfolio.
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Re: Who Believes in International Bonds and Why

Post by nisiprius » Sun Sep 27, 2015 10:39 am

stemikger wrote:...I don't believe in international bonds because IMHO it is just something one fund company does and the others have to offer it. It is just marketing and will not add value. Did we need it a few years back before anyone offered it?...
Just for the record, PIMCO has been offering PIMCO Global Bond (USD-Hedged), PGBIX and other share classes, since 1995. From inception of VTABX to date, the two funds have behaved pretty similarly:

Source: Morningstar

Blue, Vanguard Total International Bond, Admiral shares; Orange, PIMCO Global Bond (USD-Hedged), Institutional shares.
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Re: Who Believes in International Bonds and Why

Post by Bustoff » Sun Sep 27, 2015 10:46 am

SpideyIndexer wrote: I was curious about whether there are folks out there who do believe in holding large percentage of international fixed income as Vanguard advocates.
Wasn't Vanguards advice prior to the growing list of other nations adopting monetary easing policies ?

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Re: Who Believes in International Bonds and Why

Post by nedsaid » Sun Sep 27, 2015 10:52 am

stemikger wrote:I try not to to read the other replies when responding, so forgive me if this was covered.

I don't believe in international bonds because IMHO it is just something one fund company does and the others have to offer it. It is just marketing and will not add value. Did we need it a few years back before anyone offered it?

I don't believe in international stocks because of the conclusion I came to after reading Common Sense on Mutual Funds by John Bogle. His argument that it is not needed makes perfect sense and I never held it and never missed it. Over 20 years and I never felt it belonged in my portfolio.
I invest in International Bonds because I wanted another asset class. I am probably getting very mild diversification benefits. In an unhedged fund, it is essentially a currency play. I wanted to hedge the US Dollar as well.

Respectfully, I have disagreed with Mr. Bogle on International Stocks. It just isn't a good idea to have all your money in one country, even if it is the United States. I have used the Japan example many times, they have many multi-national companies and this has not saved their stock market. I also want to be invested in the world's best companies regardless of where they are located.
One could make the reverse argument that there is no need to invest in US Stocks as the large foreign multinationals have a large presence here in the United States. Bogle's argument is essentially that the U.S. position in the world as an economic power isn't going to change.

Having said that, the bulk of my investments are here in the United States.
A fool and his money are good for business.

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Archie Sinclair
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Re: Who Believes in International Bonds and Why

Post by Archie Sinclair » Sun Sep 27, 2015 10:23 pm

SpideyIndexer wrote:If you are a naysayer, you are already well represented in several threads already.
It seems like there are a number of naysayers who just couldn't control themselves. :D

I'm personally a naysayer, but I'd be curious to hear more from the supporters of international bonds.

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kramer
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Re: Who Believes in International Bonds and Why

Post by kramer » Sun Sep 27, 2015 11:28 pm

Archie Sinclair wrote:
SpideyIndexer wrote:If you are a naysayer, you are already well represented in several threads already.
It seems like there are a number of naysayers who just couldn't control themselves. :D

I'm personally a naysayer, but I'd be curious to hear more from the supporters of international bonds.
I am a theoretical supporter only. I live abroad and would like to have unhedged international bonds mostly for the currency diversification. With investments based in the US and all US-bonds, even someone who is 60/40 with 60% foreign equities is only around 36% in non-dollar currencies. Also, my future Social Security payments are denominated entirely in dollars.

That being said, I have found the negatives too high to invest in unhedged international bonds:
* High expense ratio (mostly 0.35% and up)
* Indexing leads the funds to be composed mostly of very-high-debt nations and not-so-diverse
* Low interest rates on government funds (artificially low?)

With the dollar so strong at the moment, it would seem to be a good time to invest in international bonds. One thought I have had is to invest in an unhedged foreign corporate bond fund instead of an unhedged foreign government bond fund, and invest less. However, I would have to reduce foreign equity slightly, also, to account for the increased risk in that. It just seems too messy.

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nisiprius
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Re: Who Believes in International Bonds and Why

Post by nisiprius » Mon Sep 28, 2015 6:18 am

Well, let's do some math. Oh, why did I start to tackle this, this is work!

Oh, no, now that I've done the work, it didn't confirm what I expected. I hate it when that happens. I had suspected that most of Vanguard Total International Bond Index Fund was actually held in their all-in-one target date and LifeStrategy funds, and thus the most common reason for "believing in international bonds" would be "believing in Vanguard's all-in-one funds... whatever Vanguard thinks is best."

I was wrong.

About 43% is held in these funds.

Code: Select all

Fund                          % VTIBX   $ assets  $ VTIBX
                              (bil)     (bil)
TR income VTINX               16.0%     10.9      1.7
TR 2010 VTENX                 15.1%     6.4       1.0
TR 2015 VTXVX                 12.8%     19.8      2.5
TR 2020 VTWNX                 12.1%     28.3      3.4
TR 2025 VTTVX                 9.9%      31.8      3.1
TR 2030 VTHRX                 7.6%      24.2      1.8
TR 2035 VTTHX                 5.4%      24.2      1.3
TR 2040 VFORX                 3.1%      16.8      0.5
TR 2045 VTIVX                 3.0%      15.1      0.5
TR 2050 VFIFX                 3.0%      8.3       0.2
TR 2055 VFFVX                 3.0%      2.4       0.1
TR 2060 VTTSX                 3.1%      0.8       0.0
                              
LifeStrategy Income VASIX     24.1%     3.3       0.8
LifeStrategy Conserv VSCGX    18.0%     7.6       1.4
LifeStrategy Moderate VSMGX   12.0%     12.0      1.4
LifeStrategy Growth VASGX     6.1%      10.9      0.7
                              
                              
                                                  20.5
Total International Bond VTIBX                    47.9
                              
% in all-in-one funds                             42.9%
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Re: Who Believes in International Bonds and Why

Post by Beliavsky » Mon Sep 28, 2015 7:33 am

SpideyIndexer wrote:There has been quite a bit of discussion on why international fixed income is not a good idea. I was curious about whether there are folks out there who do believe in holding large percentage of international fixed income as Vanguard advocates. Please post if you are one and mention your reasons. If you are a naysayer, you are already well represented in several threads already.
One reason to invest in bonds rather than cash to harvest the "term premium". If you think the term premium exists in countries other than the U.S., and if you think the term premiums in various countries are not that highly correlated, it makes sense to get exposure to term premiums in many countries, not just the U.S.

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Re: Who Believes in International Bonds and Why

Post by long_gamma » Mon Sep 28, 2015 8:49 am

alex_686 wrote:
lee1026 wrote:
If I understand the No Arbitrage Pricing Theory of Futures, futures don't tells us the price of something in the future - it tells us what the current yield curve is. Or am I missing something here? What data and calculations are you using?
Yes, the market tells us what the current yield curve looks like. Basically, if you buy a set of Eurodollar futures today, and it turns that the 10 year yield less than around ~3.5% 5 years in the future, you will make money.

Now, I did buy Eurodollar futures, so I agree with you that it is quite likely the 10 year will be lower than 3.5% 5 years in the future, but I think there is a chance that I can lose money on this bet.
Can you tell me which Eurodollar future you are looking at? Exchange and expiration.

I ask because the current 10 year Treasury is about 2.1. They carry for a 10 year treasury for 5 years is about 1.5%. At a glance, the higher price just seems to be the normal price of carry. The price of all futures, ignoring storage, lease, and convenience costs, raise steadily upwards.
deleted. Read the question again, my answer was not relevant
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Re: Who Believes in International Bonds and Why

Post by long_gamma » Mon Sep 28, 2015 11:31 am

Another reason to invest in International bonds which are currency hedged is "hedge return" itself is positive over long periods, which adds another component for the bond return.

https://personal.vanguard.com/pdf/ISGHC.pdf
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Re: Who Believes in International Bonds and Why

Post by Dulocracy » Mon Sep 28, 2015 1:29 pm

Some want return from their bonds. If you are seeking more return, international MAY provide that. For my fixed income, I am trying to figure out how to lock in the most security. For me, security is having no loss (due to fluctuation or interest rate change). Fixed income for me is a complicated matter; however, international bonds does not fit into my picture, so I hold none and plan on holding none. Similarly, unless there is a solid diversification benefit that levels volatility of a portfolio, I will likely never own corporate bonds (the argument mentioned here is something I have heard both ways... but that is a different discussion).

IF the point of bonds in my portfolio was NOT just trying for maximum stability, I likely would hold a small portion of international bonds. As it is, I take all of my risk on the equities part of my portfolio, and I take more risk there (tilting small and value), so I invest in fixed income with a different goal.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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steve roy
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Re: Who Believes in International Bonds and Why

Post by steve roy » Mon Sep 28, 2015 3:51 pm

nisiprius wrote:
galeno wrote:For those who count their money in USD, non-USD bonds are a mistake. BND vs BNDX. Lower yield. Longer duration. Currency risk which is not desirable in a fixed income allocation.
I repeat, I don't personally use this fund and don't intend to.

But it's currency-hedged so there should not be (much?) currency risk. It's a nice plain old boring bond fund. I'm not afraid of it, it's one of any number of "perfectly cromulent" bond funds you could choose, I just don't have any personal conviction in it and probably couldn't stay the course in it when the other side of diversification, underperformance, shows up.

Since inception it has outperformed Total Bond nicely since inception, which make me think that the currency hedging must be working. To the eyeball, it hasn't had more risk in the sense of wider fluctuations or sudden surprises. For comparison, look at Templeton Global Bond (TPINX), an aggressive and unhedged "bond" fund that is not "bond-like" at all.

Source: Morningstar

Image
Hmmm. Time to pause ... and reflect. Maybe Vanguard's International Bond fund is worth looking at, after all.

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Re: Who Believes in International Bonds and Why

Post by Valuethinker » Mon Sep 28, 2015 4:43 pm

kramer wrote:
Archie Sinclair wrote:
SpideyIndexer wrote:If you are a naysayer, you are already well represented in several threads already.
It seems like there are a number of naysayers who just couldn't control themselves. :D

I'm personally a naysayer, but I'd be curious to hear more from the supporters of international bonds.
I am a theoretical supporter only. I live abroad and would like to have unhedged international bonds mostly for the currency diversification. With investments based in the US and all US-bonds, even someone who is 60/40 with 60% foreign equities is only around 36% in non-dollar currencies. Also, my future Social Security payments are denominated entirely in dollars.

That being said, I have found the negatives too high to invest in unhedged international bonds:
* High expense ratio (mostly 0.35% and up)
* Indexing leads the funds to be composed mostly of very-high-debt nations and not-so-diverse
* Low interest rates on government funds (artificially low?)

With the dollar so strong at the moment, it would seem to be a good time to invest in international bonds. One thought I have had is to invest in an unhedged foreign corporate bond fund instead of an unhedged foreign government bond fund, and invest less. However, I would have to reduce foreign equity slightly, also, to account for the increased risk in that. It just seems too messy.
The roots of EM crises, and in fact the Greek Crisis (to an extent) has been borrowing by private entities in currencies that then devalue. This is the "contagion" factor how a property crash in Thailand can bring Russia and Brasil down, despite almost no ties between their economies.

(Greece it's actually a banking thing. The Greek banks have "borrowed" by denominating their deposits in Euros. If there was a Grexit, then there would be the mother of all bank runs (in fact it has already happened)).

So I caution about the risk levels of holding bonds of foreign corporates. Yes you get companies like Nestle (dead solid) and, er, VW ( ;-)). But you also get companies that can be seriously hurt by say, issuing Eurobonds in dollars (the largest borrowing currency, Eurobond market has nothing to do with the Euro currency) and then suffer devaluations (that are not hedged by operations in dollar countries).

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Re: Who Believes in International Bonds and Why

Post by unclescrooge » Mon Sep 28, 2015 5:46 pm

I believe in international diversification, so some int'l bonds would be fine.

However, considering that the future returns of a bond are correlated with the current yield, and the yield on many int'l developed market bonds is zero or even negative, I have no desire to own them.

So my int'l bond exposure is limited to Emerging Markets.

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