I’m still not a fan of international bond funds

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Re: I’m still not a fan of international bond funds

Post by abuss368 »

nedsaid wrote: Fri Apr 26, 2019 6:59 pm
abuss368 wrote: Thu Apr 25, 2019 8:21 pm Bogleheads -

One point that appears to have changed over the years as we have become a more globalized society and thus investment world is that Total Bond Index will hold bonds issued in U.S. dollars from international companies, and Total International Bond Index will hold bonds issued buy U.S. companies overseas (i.e. Apple, Berkshire, etc.).

I believe international bonds are the largest asset class.
For whatever it is worth, I recently made a small purchase of IAGG, International Aggregate Bond ETF, adding to a position I already held. I will likely put more of my bonds into International over time. Hard to ignore the world's largest asset class. That said, this is an entirely optional asset class, I believe the diversification benefits are minor.
Agree. Diversification benefits appear to be small.
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Re: I’m still not a fan of international bond funds

Post by fortyofforty »

abuss368 wrote: Fri Apr 26, 2019 7:03 pm
nedsaid wrote: Fri Apr 26, 2019 6:59 pm
abuss368 wrote: Thu Apr 25, 2019 8:21 pm Bogleheads -

One point that appears to have changed over the years as we have become a more globalized society and thus investment world is that Total Bond Index will hold bonds issued in U.S. dollars from international companies, and Total International Bond Index will hold bonds issued buy U.S. companies overseas (i.e. Apple, Berkshire, etc.).

I believe international bonds are the largest asset class.
For whatever it is worth, I recently made a small purchase of IAGG, International Aggregate Bond ETF, adding to a position I already held. I will likely put more of my bonds into International over time. Hard to ignore the world's largest asset class. That said, this is an entirely optional asset class, I believe the diversification benefits are minor.
Agree. Diversification benefits appear to be small.
But we're told that diversification is the sole "free lunch" in investing.
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Re: I’m still not a fan of international bond funds

Post by abuss368 »

fortyofforty wrote: Fri Apr 26, 2019 8:08 pm
abuss368 wrote: Fri Apr 26, 2019 7:03 pm
nedsaid wrote: Fri Apr 26, 2019 6:59 pm
abuss368 wrote: Thu Apr 25, 2019 8:21 pm Bogleheads -

One point that appears to have changed over the years as we have become a more globalized society and thus investment world is that Total Bond Index will hold bonds issued in U.S. dollars from international companies, and Total International Bond Index will hold bonds issued buy U.S. companies overseas (i.e. Apple, Berkshire, etc.).

I believe international bonds are the largest asset class.
For whatever it is worth, I recently made a small purchase of IAGG, International Aggregate Bond ETF, adding to a position I already held. I will likely put more of my bonds into International over time. Hard to ignore the world's largest asset class. That said, this is an entirely optional asset class, I believe the diversification benefits are minor.
Agree. Diversification benefits appear to be small.
But we're told that diversification is the sole "free lunch" in investing.
Indeed. Somehow with International bonds this is not mentioned.
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Re: I’m still not a fan of international bond funds

Post by spdoublebass »

Maybe I'm just really missing something, but what is so bad with International bonds? Sometimes I think it's obly because the sec yield percentage on the websites is so low.

When I go to PV and compare BND to BNDX I don't see the issue. Yes, I know BNDX has only been around since 2014, but still.

Since Jan 2014:
BND= 2.9% CAGR
BNDX= 4.31% CAGR

(sorry I would post a link but I still haven't figured out how)

Again, Maybe I'm missing something. I know using earlier years with the backtesting shows more downside. I am not that advanced so I'm not trying to defend international bonds, but I just don't see why everyone is so worried about them.
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Re: I’m still not a fan of international bond funds

Post by fortyofforty »

spdoublebass wrote: Fri Apr 26, 2019 11:32 pm Maybe I'm just really missing something, but what is so bad with International bonds? Sometimes I think it's obly because the sec yield percentage on the websites is so low.

When I go to PV and compare BND to BNDX I don't see the issue. Yes, I know BNDX has only been around since 2014, but still.

Since Jan 2014:
BND= 2.9% CAGR
BNDX= 4.31% CAGR

(sorry I would post a link but I still haven't figured out how)

Again, Maybe I'm missing something. I know using earlier years with the backtesting shows more downside. I am not that advanced so I'm not trying to defend international bonds, but I just don't see why everyone is so worried about them.
I refer to that as the Boglehead Conundrum. Somehow, the "bonds are for safety" crowd claims that holding bonds from one country is safer than increasing diversification and spreading their investments across the entire globe. However, with equities, it's very risky to hold stocks of only one country, even if it's the United States, and global diversification decreases risk. I still haven't figured out the logic of simultaneously holding these two positions. There is no right answer, I suspect: sometimes global diversification pays off and sometimes it doesn't, in equities and bonds. That's why I personally refrain from demanding global ideological purity among equity investors.
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Re: I’m still not a fan of international bond funds

Post by bgf »

fortyofforty wrote: Sat Apr 27, 2019 7:24 am
spdoublebass wrote: Fri Apr 26, 2019 11:32 pm Maybe I'm just really missing something, but what is so bad with International bonds? Sometimes I think it's obly because the sec yield percentage on the websites is so low.

When I go to PV and compare BND to BNDX I don't see the issue. Yes, I know BNDX has only been around since 2014, but still.

Since Jan 2014:
BND= 2.9% CAGR
BNDX= 4.31% CAGR

(sorry I would post a link but I still haven't figured out how)

Again, Maybe I'm missing something. I know using earlier years with the backtesting shows more downside. I am not that advanced so I'm not trying to defend international bonds, but I just don't see why everyone is so worried about them.
I refer to that as the Boglehead Conundrum. Somehow, the "bonds are for safety" crowd claims that holding bonds from one country is safer than increasing diversification and spreading their investments across the entire globe. However, with equities, it's very risky to hold stocks of only one country, even if it's the United States, and global diversification decreases risk. I still haven't figured out the logic of simultaneously holding these two positions. There is no right answer, I suspect: sometimes global diversification pays off and sometimes it doesn't, in equities and bonds. That's why I personally refrain from demanding global ideological purity among equity investors.
i think it stems from the academic fiction that treasuries are risk free. by adding risk to risk free you end up with risk.

if we treated treasuries as carrying risk, then i dont think it would be such a conflict.
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"Better diversification?"

Post by Taylor Larimore »

fortyofforty wrote: Fri Apr 26, 2019 8:08 pm
But we're told that diversification is the sole "free lunch" in investing.
fortyofforty:

We're also told:
Better diversification is the refuge of the scoundrel. -- Jack Bogle
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: "Better diversification?"

Post by fortyofforty »

Taylor Larimore wrote: Sat Apr 27, 2019 9:26 am
fortyofforty wrote: Fri Apr 26, 2019 8:08 pm
But we're told that diversification is the sole "free lunch" in investing.
fortyofforty:

We're also told:
Better diversification is the refuge of the scoundrel. -- Jack Bogle
Best wishes.
Taylor
Which all circles back to your oft-repeated mantra that when experts disagree, it's because the differences in returns between the approaches are likely to be very small. Thanks, Taylor.
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Re: I’m still not a fan of international bond funds

Post by ankonaman »

abuss368 wrote: Wed Apr 24, 2019 7:37 pm
ankonaman wrote: Thu Apr 04, 2019 6:59 pm I think I'll let the folks at Wellington/Wellesley continue picking my bonds for me.
I am not sure that those funds include international bonds in their holdings.

They have a few and they certainly have the ability to add them for the portfolio. If they do not feel the need, neither do I.
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Re: I’m still not a fan of international bond funds

Post by abuss368 »

fortyofforty wrote: Sat Apr 27, 2019 7:24 am I refer to that as the Boglehead Conundrum. Somehow, the "bonds are for safety" crowd claims that holding bonds from one country is safer than increasing diversification and spreading their investments across the entire globe. However, with equities, it's very risky to hold stocks of only one country, even if it's the United States, and global diversification decreases risk. I still haven't figured out the logic of simultaneously holding these two positions. There is no right answer, I suspect: sometimes global diversification pays off and sometimes it doesn't, in equities and bonds. That's why I personally refrain from demanding global ideological purity among equity investors.
Perhaps that is why Vanguard investment experts included U.S. and International stocks and U.S. and International bonds.
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Re: I’m still not a fan of international bond funds

Post by abuss368 »

bgf wrote: Sat Apr 27, 2019 7:36 am
fortyofforty wrote: Sat Apr 27, 2019 7:24 am
spdoublebass wrote: Fri Apr 26, 2019 11:32 pm Maybe I'm just really missing something, but what is so bad with International bonds? Sometimes I think it's obly because the sec yield percentage on the websites is so low.

When I go to PV and compare BND to BNDX I don't see the issue. Yes, I know BNDX has only been around since 2014, but still.

Since Jan 2014:
BND= 2.9% CAGR
BNDX= 4.31% CAGR

(sorry I would post a link but I still haven't figured out how)

Again, Maybe I'm missing something. I know using earlier years with the backtesting shows more downside. I am not that advanced so I'm not trying to defend international bonds, but I just don't see why everyone is so worried about them.
I refer to that as the Boglehead Conundrum. Somehow, the "bonds are for safety" crowd claims that holding bonds from one country is safer than increasing diversification and spreading their investments across the entire globe. However, with equities, it's very risky to hold stocks of only one country, even if it's the United States, and global diversification decreases risk. I still haven't figured out the logic of simultaneously holding these two positions. There is no right answer, I suspect: sometimes global diversification pays off and sometimes it doesn't, in equities and bonds. That's why I personally refrain from demanding global ideological purity among equity investors.
i think it stems from the academic fiction that treasuries are risk free. by adding risk to risk free you end up with risk.

if we treated treasuries as carrying risk, then i dont think it would be such a conflict.
When David Swensen's book Unconventional success was written, I believe the debt markets for treasuries were $9 trillion. Now it is approximately $22 trillion. Perhaps it is time to reconsider additional diversification with bonds.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: I’m still not a fan of international bond funds

Post by Amadis_of_Gaul »

From my perspective, it seems that I might as well treat Treasury bonds as risk-free assets. Treasurys are the cockroaches of my portfolio; if they don't survive, nothing else will. I hold them for one reason and one reason only--their negative correlation with everything else in my portfolio. Why, then, should I look for diversification from my risk-free asset when I already have it--and in assets that have a much higher return than international bonds?
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Re: I’m still not a fan of international bond funds

Post by DB2 »

Amadis_of_Gaul wrote: Sat Apr 27, 2019 5:22 pm From my perspective, it seems that I might as well treat Treasury bonds as risk-free assets. Treasurys are the cockroaches of my portfolio; if they don't survive, nothing else will. I hold them for one reason and one reason only--their negative correlation with everything else in my portfolio. Why, then, should I look for diversification from my risk-free asset when I already have it--and in assets that have a much higher return than international bonds?
I don't pretend to have the answer, but I'll just play Devil's Advocate: what if there is a dollar crisis at some point in time (in part due to increasing and insurmountable amounts of debt) and/or the U.S. loses the world's reserve currency? And what if many investors decide to flee treasuries move into non-U.S. instead? What happens to the value of U.S. treasuries in this scenario? The U.S. might try to increase the demand for them, but again, their hands would be severely tied in this situation as confidence in the market could erode and the markets could say, "Umm, no thanks. There are other countries with a more sound fiscal situation we rather take our chances on."
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Re: I’m still not a fan of international bond funds

Post by stan1 »

DB2 wrote: Sat Apr 27, 2019 5:31 pm
Amadis_of_Gaul wrote: Sat Apr 27, 2019 5:22 pm From my perspective, it seems that I might as well treat Treasury bonds as risk-free assets. Treasurys are the cockroaches of my portfolio; if they don't survive, nothing else will. I hold them for one reason and one reason only--their negative correlation with everything else in my portfolio. Why, then, should I look for diversification from my risk-free asset when I already have it--and in assets that have a much higher return than international bonds?
I don't pretend to have the answer, but I'll just play Devil's Advocate: what if there is a dollar crisis at some point in time (in part due to increasing and insurmountable amounts of debt) and/or the U.S. loses the world's reserve currency? And what if many investors decide to flee treasuries move into non-U.S. instead? What happens to the value of U.S. treasuries in this scenario?
It won't happen overnight (short of the true black swans like nuclear war). Make decisions based on the best information you have today, but maybe there will be new or better information in the future that can't be predicted now.
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Re: I’m still not a fan of international bond funds

Post by DB2 »

stan1 wrote: Sat Apr 27, 2019 5:35 pm
DB2 wrote: Sat Apr 27, 2019 5:31 pm
Amadis_of_Gaul wrote: Sat Apr 27, 2019 5:22 pm From my perspective, it seems that I might as well treat Treasury bonds as risk-free assets. Treasurys are the cockroaches of my portfolio; if they don't survive, nothing else will. I hold them for one reason and one reason only--their negative correlation with everything else in my portfolio. Why, then, should I look for diversification from my risk-free asset when I already have it--and in assets that have a much higher return than international bonds?
I don't pretend to have the answer, but I'll just play Devil's Advocate: what if there is a dollar crisis at some point in time (in part due to increasing and insurmountable amounts of debt) and/or the U.S. loses the world's reserve currency? And what if many investors decide to flee treasuries move into non-U.S. instead? What happens to the value of U.S. treasuries in this scenario?
It won't happen overnight (short of the true black swans like nuclear war). Make decisions based on the best information you have today, but maybe there will be new or better information in the future that can't be predicted now.
Agreed, this wouldn't happen right away. We don't know either way if this would or would not happen (although I was told every 50-100 years the world's reserve currency does tend to change). Based on information today, one could be concerned about the growing U.S. debt, rise of certain political views within some of the younger generation, and long term-implications as well as some of the Fed policies since Greenspan (note, I am not looking to discuss or debate this per forum rules). The U.S. will also drop to the third largest economy within 15 years behind China and India. But just putting it out there and why there could be a case for an allocation of international bonds from one perspective from a long term investing viewpoint. Just giving some context to it all.
Last edited by DB2 on Sat Apr 27, 2019 6:23 pm, edited 1 time in total.
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Re: I’m still not a fan of international bond funds

Post by abuss368 »

David Swensen, Yale University CIO, has recommend a two fund strategy for bonds: Treasuries and TIPS.
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Re: I’m still not a fan of international bond funds

Post by pascalwager »

Ironically, it was the Vanguard international bonds study itself that leads me to believe that I don't need them.
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Re: I’m still not a fan of international bond funds

Post by Amadis_of_Gaul »

DB2 wrote: Sat Apr 27, 2019 5:31 pm
I don't pretend to have the answer, but I'll just play Devil's Advocate: what if there is a dollar crisis at some point in time (in part due to increasing and insurmountable amounts of debt) and/or the U.S. loses the world's reserve currency? And what if many investors decide to flee treasuries move into non-U.S. instead? What happens to the value of U.S. treasuries in this scenario? The U.S. might try to increase the demand for them, but again, their hands would be severely tied in this situation as confidence in the market could erode and the markets could say, "Umm, no thanks. There are other countries with a more sound fiscal situation we rather take our chances on."
Certainly, such things are possible! However, I do think it's true that the U.S. currently has "cleanest dirty sheet in the hamper" status. There are reasons to be concerned about the future of the country, but it does not seem to me that the correct answer is to "diversify" by buying bonds issued by a future train wreck like Italy. Additionally, I don't think that anybody outside of China knows the true state of the Chinese economy, they have a huge demographic problem, and by returning to nationalization, they seem to be moving in the wrong direction economically.

My crystal ball is as cloudy as everyone else's, but I see no reason to believe that an international-bond allocation would decrease my risk rather than adding to it.
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Re: I’m still not a fan of international bond funds

Post by DB2 »

Amadis_of_Gaul wrote: Mon Apr 29, 2019 8:12 am
DB2 wrote: Sat Apr 27, 2019 5:31 pm
I don't pretend to have the answer, but I'll just play Devil's Advocate: what if there is a dollar crisis at some point in time (in part due to increasing and insurmountable amounts of debt) and/or the U.S. loses the world's reserve currency? And what if many investors decide to flee treasuries move into non-U.S. instead? What happens to the value of U.S. treasuries in this scenario? The U.S. might try to increase the demand for them, but again, their hands would be severely tied in this situation as confidence in the market could erode and the markets could say, "Umm, no thanks. There are other countries with a more sound fiscal situation we rather take our chances on."
Certainly, such things are possible! However, I do think it's true that the U.S. currently has "cleanest dirty sheet in the hamper" status. There are reasons to be concerned about the future of the country, but it does not seem to me that the correct answer is to "diversify" by buying bonds issued by a future train wreck like Italy. Additionally, I don't think that anybody outside of China knows the true state of the Chinese economy, they have a huge demographic problem, and by returning to nationalization, they seem to be moving in the wrong direction economically.

My crystal ball is as cloudy as everyone else's, but I see no reason to believe that an international-bond allocation would decrease my risk rather than adding to it.
I agree the U.S. is currently the "cleanest dirty shirt in the hamper" as of today and likely will be for the nearer term. I was thinking more of the longer term. Interestingly enough, I see the Vanguard Target Fund 2040 (which is probably closer to my retirement year) has about 30% in International/70% in Total Bond Market.
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Re: I’m still not a fan of international bond funds

Post by fortyofforty »

Amadis_of_Gaul wrote: Mon Apr 29, 2019 8:12 am
DB2 wrote: Sat Apr 27, 2019 5:31 pm
I don't pretend to have the answer, but I'll just play Devil's Advocate: what if there is a dollar crisis at some point in time (in part due to increasing and insurmountable amounts of debt) and/or the U.S. loses the world's reserve currency? And what if many investors decide to flee treasuries move into non-U.S. instead? What happens to the value of U.S. treasuries in this scenario? The U.S. might try to increase the demand for them, but again, their hands would be severely tied in this situation as confidence in the market could erode and the markets could say, "Umm, no thanks. There are other countries with a more sound fiscal situation we rather take our chances on."
Certainly, such things are possible! However, I do think it's true that the U.S. currently has "cleanest dirty sheet in the hamper" status. There are reasons to be concerned about the future of the country, but it does not seem to me that the correct answer is to "diversify" by buying bonds issued by a future train wreck like Italy. Additionally, I don't think that anybody outside of China knows the true state of the Chinese economy, they have a huge demographic problem, and by returning to nationalization, they seem to be moving in the wrong direction economically.

My crystal ball is as cloudy as everyone else's, but I see no reason to believe that an international-bond allocation would decrease my risk rather than adding to it.
Given that cloudy crystal ball, do you have reason to believe that an international equity allocation would decrease your risk rather than add to it?
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Re: I’m still not a fan of international bond funds

Post by Amadis_of_Gaul »

fortyofforty wrote: Tue Apr 30, 2019 6:28 am
Given that cloudy crystal ball, do you have reason to believe that an international equity allocation would decrease your risk rather than add to it?
As a Treasury-bond investor, my risk in fixed should be so low that no amount of diversification can decrease it. The risk of my bonds betraying me is about equal to the risk of the economic ruin of the U.S. government, and if that happens, I've got bigger problems!
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Re: I’m still not a fan of international bond funds

Post by typical.investor »

Amadis_of_Gaul wrote: Tue Apr 30, 2019 8:00 am
fortyofforty wrote: Tue Apr 30, 2019 6:28 am
Given that cloudy crystal ball, do you have reason to believe that an international equity allocation would decrease your risk rather than add to it?
As a Treasury-bond investor, my risk in fixed should be so low that no amount of diversification can decrease it. The risk of my bonds betraying me is about equal to the risk of the economic ruin of the U.S. government, and if that happens, I've got bigger problems!
You miss the main point I think.

It's not so much about diversifying credit risk. Actually, you are probably making it worse by using countries that aren't as economically powerful as the US.

The point rather is that interest rate hikes and inflation run on different schedules. So international bonds could be useful if US rates rise and suffer NAV losses and you are funding (at least some of) your retirement by selling out of bonds.
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Re: I’m still not a fan of international bond funds

Post by fortyofforty »

typical.investor wrote: Tue Apr 30, 2019 8:24 am
Amadis_of_Gaul wrote: Tue Apr 30, 2019 8:00 am
fortyofforty wrote: Tue Apr 30, 2019 6:28 am
Given that cloudy crystal ball, do you have reason to believe that an international equity allocation would decrease your risk rather than add to it?
As a Treasury-bond investor, my risk in fixed should be so low that no amount of diversification can decrease it. The risk of my bonds betraying me is about equal to the risk of the economic ruin of the U.S. government, and if that happens, I've got bigger problems!
You miss the main point I think.

It's not so much about diversifying credit risk. Actually, you are probably making it worse by using countries that aren't as economically powerful as the US.

The point rather is that interest rate hikes and inflation run on different schedules. So international bonds could be useful if US rates rise and suffer NAV losses and you are funding (at least some of) your retirement by selling out of bonds.
Amadis's answer is reminiscent of those who reasonably argue that they don't need to diversify beyond the S&P 500. If the 500 largest corporations in the United States go belly up, we've all got bigger problems than the balances of our 401(k)s. Diversification is the only free lunch in investing, whether debt or equity, is it not?
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Re: I’m still not a fan of international bond funds

Post by nedsaid »

fortyofforty wrote: Sat Apr 27, 2019 7:24 am
spdoublebass wrote: Fri Apr 26, 2019 11:32 pm Maybe I'm just really missing something, but what is so bad with International bonds? Sometimes I think it's obly because the sec yield percentage on the websites is so low.

When I go to PV and compare BND to BNDX I don't see the issue. Yes, I know BNDX has only been around since 2014, but still.

Since Jan 2014:
BND= 2.9% CAGR
BNDX= 4.31% CAGR

(sorry I would post a link but I still haven't figured out how)

Again, Maybe I'm missing something. I know using earlier years with the backtesting shows more downside. I am not that advanced so I'm not trying to defend international bonds, but I just don't see why everyone is so worried about them.
I refer to that as the Boglehead Conundrum. Somehow, the "bonds are for safety" crowd claims that holding bonds from one country is safer than increasing diversification and spreading their investments across the entire globe. However, with equities, it's very risky to hold stocks of only one country, even if it's the United States, and global diversification decreases risk. I still haven't figured out the logic of simultaneously holding these two positions. There is no right answer, I suspect: sometimes global diversification pays off and sometimes it doesn't, in equities and bonds. That's why I personally refrain from demanding global ideological purity among equity investors.
I can't speak for other Bogleheads or the "bonds are for safety" crowd. I will just say that I am willing to accept risks on the bond side of the portfolio that are relatively small compared to the risks that I am taking on the equity side. Thus my bonds are more than just nominal treasuries. I own corporates and US Government Agency Bonds in my bond portfolio through my bond funds. I also subscribe to the broad diversification is better than narrow diversification theory so I have decided to hold international bonds as well. I was surprised that my "domestic" bond funds, including Vanguard Total Bond Index, hold foreign bonds. So I am going to get them whether I want them or not. I may as well join the crowd.

The answer to your conundrum is that US Treasuries are considered 100% safe and if you want safe bonds there is no reason to diversify beyond nominal US Treasuries. The assumption is that the US Government will never default on its debt, an assumption that I share. I will say that each asset class, even Treasuries, carry their own unique risks and we haven't seen a crisis yet that has exposed whatever unique risks that US Treasuries have, my suspicion is that is an inflation risk. For that reason, I also hold TIPS. As we saw during the 2008-2009 financial crisis, the unique risks related to TIPS showed up and TIPS funds were temporarily down 11%-12% while nominal treasuries were up. As I recall, it had to do with liquidity as TIPS are a much smaller market than nominal treasuries. But the problem with the financial crisis was potential deflation and not inflation.

Probably the number one reason that I hold International Bonds is that they are the largest asset class in the world. Kind of hard to ignore them and indeed a bit hard to avoid altogether.
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Re: I’m still not a fan of international bond funds

Post by fortyofforty »

nedsaid wrote: Tue Apr 30, 2019 9:47 am
fortyofforty wrote: Sat Apr 27, 2019 7:24 am
spdoublebass wrote: Fri Apr 26, 2019 11:32 pm Maybe I'm just really missing something, but what is so bad with International bonds? Sometimes I think it's obly because the sec yield percentage on the websites is so low.

When I go to PV and compare BND to BNDX I don't see the issue. Yes, I know BNDX has only been around since 2014, but still.

Since Jan 2014:
BND= 2.9% CAGR
BNDX= 4.31% CAGR

(sorry I would post a link but I still haven't figured out how)

Again, Maybe I'm missing something. I know using earlier years with the backtesting shows more downside. I am not that advanced so I'm not trying to defend international bonds, but I just don't see why everyone is so worried about them.
I refer to that as the Boglehead Conundrum. Somehow, the "bonds are for safety" crowd claims that holding bonds from one country is safer than increasing diversification and spreading their investments across the entire globe. However, with equities, it's very risky to hold stocks of only one country, even if it's the United States, and global diversification decreases risk. I still haven't figured out the logic of simultaneously holding these two positions. There is no right answer, I suspect: sometimes global diversification pays off and sometimes it doesn't, in equities and bonds. That's why I personally refrain from demanding global ideological purity among equity investors.
I can't speak for other Bogleheads or the "bonds are for safety" crowd. I will just say that I am willing to accept risks on the bond side of the portfolio that are relatively small compared to the risks that I am taking on the equity side. Thus my bonds are more than just nominal treasuries. I own corporates and US Government Agency Bonds in my bond portfolio through my bond funds. I also subscribe to the broad diversification is better than narrow diversification theory so I have decided to hold international bonds as well. I was surprised that my "domestic" bond funds, including Vanguard Total Bond Index, hold foreign bonds. So I am going to get them whether I want them or not. I may as well join the crowd.

The answer to your conundrum is that US Treasuries are considered 100% safe and if you want safe bonds there is no reason to diversify beyond nominal US Treasuries. The assumption is that the US Government will never default on its debt, an assumption that I share. I will say that each asset class, even Treasuries, carry their own unique risks and we haven't seen a crisis yet that has exposed whatever unique risks that US Treasuries have, my suspicion is that is an inflation risk. For that reason, I also hold TIPS. As we saw during the 2008-2009 financial crisis, the unique risks related to TIPS showed up and TIPS funds were temporarily down 11%-12% while nominal treasuries were up. As I recall, it had to do with liquidity as TIPS are a much smaller market than nominal treasuries. But the problem with the financial crisis was potential deflation and not inflation.

Probably the number one reason that I hold International Bonds is that they are the largest asset class in the world. Kind of hard to ignore them and indeed a bit hard to avoid altogether.
I think each of us is feeling his or her way along a dimly lit path, unsure of which path will be best over any length of time. All we can do is make choices based on the available information, past performance, projections, and educated guesses. That's why I find it absurd to be highly critical of those who choose to invest 100% in American bonds or equities. I also respect those who follow the idea of global capitalization weight in equities and bonds, or as close as possible: let the market decide how much to invest in any particular asset, and stop worrying about making that call. Again, to each her own.
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Re: I’m still not a fan of international bond funds

Post by nedsaid »

fortyofforty wrote: Tue Apr 30, 2019 5:58 pm
nedsaid wrote: Tue Apr 30, 2019 9:47 am

I can't speak for other Bogleheads or the "bonds are for safety" crowd. I will just say that I am willing to accept risks on the bond side of the portfolio that are relatively small compared to the risks that I am taking on the equity side. Thus my bonds are more than just nominal treasuries. I own corporates and US Government Agency Bonds in my bond portfolio through my bond funds. I also subscribe to the broad diversification is better than narrow diversification theory so I have decided to hold international bonds as well. I was surprised that my "domestic" bond funds, including Vanguard Total Bond Index, hold foreign bonds. So I am going to get them whether I want them or not. I may as well join the crowd.

The answer to your conundrum is that US Treasuries are considered 100% safe and if you want safe bonds there is no reason to diversify beyond nominal US Treasuries. The assumption is that the US Government will never default on its debt, an assumption that I share. I will say that each asset class, even Treasuries, carry their own unique risks and we haven't seen a crisis yet that has exposed whatever unique risks that US Treasuries have, my suspicion is that is an inflation risk. For that reason, I also hold TIPS. As we saw during the 2008-2009 financial crisis, the unique risks related to TIPS showed up and TIPS funds were temporarily down 11%-12% while nominal treasuries were up. As I recall, it had to do with liquidity as TIPS are a much smaller market than nominal treasuries. But the problem with the financial crisis was potential deflation and not inflation.

Probably the number one reason that I hold International Bonds is that they are the largest asset class in the world. Kind of hard to ignore them and indeed a bit hard to avoid altogether.
I think each of us is feeling his or her way along a dimly lit path, unsure of which path will be best over any length of time. All we can do is make choices based on the available information, past performance, projections, and educated guesses. That's why I find it absurd to be highly critical of those who choose to invest 100% in American bonds or equities. I also respect those who follow the idea of global capitalization weight in equities and bonds, or as close as possible: let the market decide how much to invest in any particular asset, and stop worrying about making that call. Again, to each her own.
There are a number of solid approaches to portfolio design.

What gives me pause was a remark that Dr. Bill Bernstein made in his 4 Pillars of Investing book that over very, very long periods of time that the returns of stocks and bonds are identical. The time horizon would be hundreds of years if not a millennium. So I suppose that if the United States continues to become wealthier and wealthier that the returns from stocks would drop, eventually to the point where stock returns and bond returns are identical. So we assume that stocks return more than bonds but at some point that might no longer be true. We were born early enough in the history of the United States that we could benefit from tremendous growth in its economy. Perhaps somebody born 200 years from now won't be so lucky.

But yes, it is well educated guesswork we are doing around here. Much better than going to the racetrack and betting on the 7th horse in the 3rd race. No guarantees with investing but many things we can do to improve our chances of success.
A fool and his money are good for business.
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Re: I’m still not a fan of international bond funds

Post by Corgitodd »

Back in 1980-2000, my parents bought a few different High Yield Bond funds. Not sure why, maybe International Bond Funds weren't yet available or weren't being marketed.
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Re: I’m still not a fan of international bond funds

Post by fortyofforty »

nedsaid wrote: Wed May 01, 2019 1:38 pm
fortyofforty wrote: Tue Apr 30, 2019 5:58 pm
nedsaid wrote: Tue Apr 30, 2019 9:47 am

I can't speak for other Bogleheads or the "bonds are for safety" crowd. I will just say that I am willing to accept risks on the bond side of the portfolio that are relatively small compared to the risks that I am taking on the equity side. Thus my bonds are more than just nominal treasuries. I own corporates and US Government Agency Bonds in my bond portfolio through my bond funds. I also subscribe to the broad diversification is better than narrow diversification theory so I have decided to hold international bonds as well. I was surprised that my "domestic" bond funds, including Vanguard Total Bond Index, hold foreign bonds. So I am going to get them whether I want them or not. I may as well join the crowd.

The answer to your conundrum is that US Treasuries are considered 100% safe and if you want safe bonds there is no reason to diversify beyond nominal US Treasuries. The assumption is that the US Government will never default on its debt, an assumption that I share. I will say that each asset class, even Treasuries, carry their own unique risks and we haven't seen a crisis yet that has exposed whatever unique risks that US Treasuries have, my suspicion is that is an inflation risk. For that reason, I also hold TIPS. As we saw during the 2008-2009 financial crisis, the unique risks related to TIPS showed up and TIPS funds were temporarily down 11%-12% while nominal treasuries were up. As I recall, it had to do with liquidity as TIPS are a much smaller market than nominal treasuries. But the problem with the financial crisis was potential deflation and not inflation.

Probably the number one reason that I hold International Bonds is that they are the largest asset class in the world. Kind of hard to ignore them and indeed a bit hard to avoid altogether.
I think each of us is feeling his or her way along a dimly lit path, unsure of which path will be best over any length of time. All we can do is make choices based on the available information, past performance, projections, and educated guesses. That's why I find it absurd to be highly critical of those who choose to invest 100% in American bonds or equities. I also respect those who follow the idea of global capitalization weight in equities and bonds, or as close as possible: let the market decide how much to invest in any particular asset, and stop worrying about making that call. Again, to each her own.
There are a number of solid approaches to portfolio design.

What gives me pause was a remark that Dr. Bill Bernstein made in his 4 Pillars of Investing book that over very, very long periods of time that the returns of stocks and bonds are identical. The time horizon would be hundreds of years if not a millennium. So I suppose that if the United States continues to become wealthier and wealthier that the returns from stocks would drop, eventually to the point where stock returns and bond returns are identical. So we assume that stocks return more than bonds but at some point that might no longer be true. We were born early enough in the history of the United States that we could benefit from tremendous growth in its economy. Perhaps somebody born 200 years from now won't be so lucky.

But yes, it is well educated guesswork we are doing around here. Much better than going to the racetrack and betting on the 7th horse in the 3rd race. No guarantees with investing but many things we can do to improve our chances of success.
And we ought to make sure our definition of "success" is realistic. I don't seek a portfolio that outperforms all other portfolios. I don't seek a portfolio that outperforms your portfolio, or anyone else's portfolio. All I seek is a portfolio that performs well enough for me to achieve my own, personal goals, and the input and ideas from you and the others on this board can help me do just that.
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Re: I’m still not a fan of international bond funds

Post by Corgitodd »

How much of Total Bond is International?
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Re: I’m still not a fan of international bond funds

Post by abuss368 »

Corgitodd wrote: Wed May 01, 2019 6:27 pm How much of Total Bond is International?
I believe it may be around 5% give or take. You would have to review the funds most recent report on Vanguard’s website.
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Re: I’m still not a fan of international bond funds

Post by Corgitodd »

US News shows VG Total Bond Fund has 8% International. VG Core Bond Fund has almost 16% International.
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Re: I’m still not a fan of international bond funds

Post by zonto »

Vanguard discloses 5% foreign bond ownership within Vanguard Total Bond Market Index Fund as of 3/31/19: https://investor.vanguard.com/mutual-fu ... olio/vbtlx.
"For real-world portfolios, the main impact of diversification is to narrow the dispersion of outcomes. [T]he most important impact is to make the worst outcomes less bad." (Vineviz)
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Re: I’m still not a fan of international bond funds

Post by Valuethinker »

zonto wrote: Thu May 02, 2019 9:23 am Vanguard discloses 5% foreign bond ownership within Vanguard Total Bond Market Index Fund as of 3/31/19: https://investor.vanguard.com/mutual-fu ... olio/vbtlx.
I believe these are bonds which are issued by US companies offshore ("Eurobonds") or by foreign companies borrowing in USD (again Eurobonds or I believe Yankee Bonds).
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Re: I’m still not a fan of international bond funds

Post by robertmcd »

I think what could be interesting is if you backtested international sovereign bonds that were considered "flight to safety" assets. You could see what bonds were negatively correlated with those international markets. For example, if the german bond is most negatively correlated with stocks markets that use the euro as their currency, you could have a correlation benefit there. Similar to how us treasuries are the best diversifier of us stocks. So in effect you could weight your international sovereign bonds holdings by your stock market exposure to each country vs. just market cap weighting international sovereign bonds.

In effect you could create a global market cap stock market risk parity portfolio. Of course US treasuries may still be the best diversifier of international stocks. I don't know how to model the strategy described above.
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Re: I’m still not a fan of international bond funds

Post by abuss368 »

robertmcd wrote: Thu May 02, 2019 11:10 am I think what could be interesting is if you backtested international sovereign bonds that were considered "flight to safety" assets. You could see what bonds were negatively correlated with those international markets. For example, if the german bond is most negatively correlated with stocks markets that use the euro as their currency, you could have a correlation benefit there. Similar to how us treasuries are the best diversifier of us stocks. So in effect you could weight your international sovereign bonds holdings by your stock market exposure to each country vs. just market cap weighting international sovereign bonds.

In effect you could create a global market cap stock market risk parity portfolio. Of course US treasuries may still be the best diversifier of international stocks. I don't know how to model the strategy described above.
I would be also interested in how international bonds have performed during periods of market duress and trauma. The financial crisis in particular.
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Re: I’m still not a fan of international bond funds

Post by Trader Joe »

I do not know of anyone in real life that invests any money in international bonds. Myself included.
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Re: I’m still not a fan of international bond funds

Post by Northern Flicker »

They increase diversification over credit risk.

They probably don't increase diversification much over duration (interest rate) risk. I imagine the duration of the international bond fund is a bit less than the US Treasury index?

Yield should be very similar because of the mechanics of FX hedging - the difference in yield is almost exactly the cost of forward hedging the currency (but goes in the opposite direction).
I think hedged int'l bonds diversify duration risk significantly. Yield curves for different currencies do not move in lockstep. Moreover, the hedge return is a very short duration cash flow with the short-term hedge contracts used so they incorporate rate changes at the short end of the curve quite rapidly, reducing duration of the combined cash flows (coupon payments and hedge return).

I would hold hedged non-US bonds as a diversifier long before I would consider US high yield bonds. It is important to keep one's eye on the ball which is that the main value of nominal bonds is to diversify equity risk or to match a nominal liability. High yield bonds are a poor choice for either role.
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Re: I’m still not a fan of international bond funds

Post by Valuethinker »

Northern Flicker wrote: Thu May 02, 2019 11:07 pm
They increase diversification over credit risk.

They probably don't increase diversification much over duration (interest rate) risk. I imagine the duration of the international bond fund is a bit less than the US Treasury index?

Yield should be very similar because of the mechanics of FX hedging - the difference in yield is almost exactly the cost of forward hedging the currency (but goes in the opposite direction).
I think hedged int'l bonds diversify duration risk significantly. Yield curves for different currencies do not move in lockstep. Moreover, the hedge return is a very short duration cash flow with the short-term hedge contracts used so they incorporate rate changes at the short end of the curve quite rapidly, reducing duration of the combined cash flows (coupon payments and hedge return).

I would hold hedged non-US bonds as a diversifier long before I would consider US high yield bonds. It is important to keep one's eye on the ball which is that the main value of nominal bonds is to diversify equity risk or to match a nominal liability. High yield bonds are a poor choice for either role.
Thank you for an interesting and informative comment.

1. What you say accords with what David Swensen says - about diversification by playing the different yield curves (I think he says real yield, in fact). I don't recall what the Vanguard paper on this said.

2. I agree that US HY bonds are a poor diversifier on an equity portfolio. Also that Foreign Bonds would be preferred.

What worries me is that Italy, the world's 4th largest govt bond market, is not zero credit risk. The markets don't think so, and of course this is an "event risk" like the UK's Brexit vote. We cannot say it is fully priced in, until it actually happens. And in the UK case the pain is taken on the exchange rate not so much the bond yield - although that could change if we had a change in government (I don't want to get into the politics of that, but to note the risk).

Italy cannot devalue its currency, the Euro. Thus if there's a crisis it will take place in the bond markets. And underneath that you have the ongoing slow motion Italian banking crisis.
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Re: I’m still not a fan of international bond funds

Post by fortyofforty »

Trader Joe wrote: Thu May 02, 2019 7:59 pm I do not know of anyone in real life that invests any money in international bonds. Myself included.
That is starting to make them even more attractive to me.
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Re: I’m still not a fan of international bond funds

Post by fortyofforty »

Valuethinker wrote: Fri May 03, 2019 3:33 am
Northern Flicker wrote: Thu May 02, 2019 11:07 pm
They increase diversification over credit risk.

They probably don't increase diversification much over duration (interest rate) risk. I imagine the duration of the international bond fund is a bit less than the US Treasury index?

Yield should be very similar because of the mechanics of FX hedging - the difference in yield is almost exactly the cost of forward hedging the currency (but goes in the opposite direction).
I think hedged int'l bonds diversify duration risk significantly. Yield curves for different currencies do not move in lockstep. Moreover, the hedge return is a very short duration cash flow with the short-term hedge contracts used so they incorporate rate changes at the short end of the curve quite rapidly, reducing duration of the combined cash flows (coupon payments and hedge return).

I would hold hedged non-US bonds as a diversifier long before I would consider US high yield bonds. It is important to keep one's eye on the ball which is that the main value of nominal bonds is to diversify equity risk or to match a nominal liability. High yield bonds are a poor choice for either role.
Thank you for an interesting and informative comment.

1. What you say accords with what David Swensen says - about diversification by playing the different yield curves (I think he says real yield, in fact). I don't recall what the Vanguard paper on this said.

2. I agree that US HY bonds are a poor diversifier on an equity portfolio. Also that Foreign Bonds would be preferred.

What worries me is that Italy, the world's 4th largest govt bond market, is not zero credit risk. The markets don't think so, and of course this is an "event risk" like the UK's Brexit vote. We cannot say it is fully priced in, until it actually happens. And in the UK case the pain is taken on the exchange rate not so much the bond yield - although that could change if we had a change in government (I don't want to get into the politics of that, but to note the risk).

Italy cannot devalue its currency, the Euro. Thus if there's a crisis it will take place in the bond markets. And underneath that you have the ongoing slow motion Italian banking crisis.
Shouldn't such "known risks" be priced in, to a large extent?
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Re: I’m still not a fan of international bond funds

Post by typical.investor »

Trader Joe wrote: Thu May 02, 2019 7:59 pm I do not know of anyone in real life that invests any money in international bonds. Myself included.
The biggest Target Date funds (Vanguard) use them (15% in retirement) and I think Vanguard's Personal Advisory Services recommend them too I believe.

Schwab's robo includes local currency emerging markets bonds. Even with it's cash allocation, it still was the best performing robo over three years (history of tracking robos) for fixed income.
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Re: I’m still not a fan of international bond funds

Post by Valuethinker »

fortyofforty wrote: Fri May 03, 2019 6:09 am
Shouldn't such "known risks" be priced in, to a large extent?
re Italian default.

Set aside the question of yields being lowered by ECB Quantitative Easing programme.

Ex ante, the yield of Italian bonds over their German (risk free) equivalents in the Eurozone includes a spread based on probability of default x expected loss from default (at least in theory)

However it either happens, or it does not.

If it does happen the probability, ex post, is now 100%, so the value of the bonds moves to the likely recovery value in restructuring.

So the market can be efficiently prices *now* (ex ante) but that does not mean it will maintain the same level if the event does happen (ex post).

Why take the risk? The impact on the Eurozone would be so huge there would almost certainly be chaos.

If one is buying a gobal investment grade bond fund, I am certainly not suggesting that one underweight Italy. After all the worst might not happen, in which case one benefited from the extra yield. And if it does happen then it is only a small portion of the total NAV. With a Eurozone government bond fund though, Italy is much the largest component. *that* gives me pause.

Note the indices tend to cap Japan at 20%. Japan has many of the same worries as Italy but it has its own currency - it can always print money.
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Re: I’m still not a fan of international bond funds

Post by Corgitodd »

I wish that Vanguard PAS would make investing in International Bond Fund optional, instead of all but mandatory in their Financial Plans.
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Re: I’m still not a fan of international bond funds

Post by robertmcd »

My biggest issue with respect to the international bond fund, and bonds in general, is that market cap weighting bonds is very different from market cap weighting equities.
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Re: I’m still not a fan of international bond funds

Post by fortyofforty »

Valuethinker wrote: Fri May 03, 2019 7:14 amNote the indices tend to cap Japan at 20%. Japan has many of the same worries as Italy but it has its own currency - it can always print money.
Just like the United States. Diversification across dozens of economies and thousands of companies might be beneficial in bonds as well as equities. We'll only know after the fact, and then it either was or it wasn't.
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Re: I’m still not a fan of international bond funds

Post by Rick Ferri »

Valuethinker wrote: Thu May 02, 2019 11:02 am
zonto wrote: Thu May 02, 2019 9:23 am Vanguard discloses 5% foreign bond ownership within Vanguard Total Bond Market Index Fund as of 3/31/19: https://investor.vanguard.com/mutual-fu ... olio/vbtlx.
I believe these are bonds which are issued by US companies offshore ("Eurobonds") or by foreign companies borrowing in USD (again Eurobonds or I believe Yankee Bonds).
It's the other way around. These are Yankee Bonds. They're issued by foreign entities in US dollars and trade in the US.

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Re: I’m still not a fan of international bond funds

Post by abuss368 »

robertmcd wrote: Fri May 03, 2019 10:04 am My biggest issue with respect to the international bond fund, and bonds in general, is that market cap weighting bonds is very different from market cap weighting equities.
David Swensen has said market cap in bond funds is essentially the most indebted country.
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Re: I’m still not a fan of international bond funds

Post by fortyofforty »

abuss368 wrote: Sat May 04, 2019 12:15 pm
robertmcd wrote: Fri May 03, 2019 10:04 am My biggest issue with respect to the international bond fund, and bonds in general, is that market cap weighting bonds is very different from market cap weighting equities.
David Swensen has said market cap in bond funds is essentially the most indebted country.
And even within one country, it's the most indebted entity (the government) and most indebted corporations (not necessarily a healthy strategy). But, without active management, it's hard to avoid cap weighting.
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Re: I’m still not a fan of international bond funds

Post by fortyofforty »

Rick Ferri wrote: Sat May 04, 2019 11:29 am
Valuethinker wrote: Thu May 02, 2019 11:02 am
zonto wrote: Thu May 02, 2019 9:23 am Vanguard discloses 5% foreign bond ownership within Vanguard Total Bond Market Index Fund as of 3/31/19: https://investor.vanguard.com/mutual-fu ... olio/vbtlx.
I believe these are bonds which are issued by US companies offshore ("Eurobonds") or by foreign companies borrowing in USD (again Eurobonds or I believe Yankee Bonds).
It's the other way around. These are Yankee Bonds. They're issued by foreign entities in US dollars and trade in the US.

Rick
I was surprised this week to see that Vanguard Money Market Prime has a large chunk of foreign debt instruments, within what I had assumed to be a "pure" domestic fund. In fact, Yankee/foreign represents over half of net assets.
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Re: I’m still not a fan of international bond funds

Post by longinvest »

fortyofforty wrote: Sat May 04, 2019 1:08 pm And even within one country, it's the most indebted entity (the government) and most indebted corporations (not necessarily a healthy strategy). But, without active management, it's hard to avoid cap weighting.
It would be more accurate to say "with the biggest debt". Many readers might understand "most indebted" as those with the "highest debt ratio", but that would be incorrect.

Japan has a much bigger debt than Slovenia. It has a much bigger economy, too. As a result, it makes sense to loan more money to Japan than to Slovenia. Cap weighting is a sensible approach to bond investing.
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