I’m still not a fan of international bond funds

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

Post by Valuethinker »

longinvest wrote: Sat May 04, 2019 2:56 pm
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.
Although, recognizing the problem, international bond benchmarks and funds tend to cap Jspan at 20 per cent.

So it is recognized that there is a problem.
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Re: I’m still not a fan of international bond funds

Post by fortyofforty »

longinvest wrote: Sat May 04, 2019 2:56 pm
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.
If a country has the most debt, it is the most indebted. I never mentioned the debt ratio, which is another subject, so I can't help what some readers might or might not understand. I agree that cap weighting makes sense, in equities and bonds.
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Re: I’m still not a fan of international bond funds

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fortyofforty wrote: Sat May 04, 2019 1:12 pm
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.
You are going to get those International Bonds whether you like them or not. Resistance is futile, you will be assimilated. :wink:
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Re: I’m still not a fan of international bond funds

Post by fortyofforty »

nedsaid wrote: Sat May 04, 2019 9:33 pm
fortyofforty wrote: Sat May 04, 2019 1:12 pm
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.
You are going to get those International Bonds whether you like them or not. Resistance is futile, you will be assimilated. :wink:
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nedsaid
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Re: I’m still not a fan of international bond funds

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The reason I have joked that resistance is futile is that I have found that my "Core Intermediate Bond" funds have probably 5-7% of their holdings in International Bonds. My American Century Diversified Bond Fund, Bond Fund of America, Fidelity US Bond Index, and Vanguard Total Bond Market all have more International Bonds in them than one would think.

I noticed that Morningstar now have "Intermediate Term Core Bond" and an "Intermediate Core Bond Plus" categories now. This is because of the branching out into International Bonds, particularly Emerging Markets Bonds, that we are seeing now.

Pretty much, I am getting them whether I want them or not. I have been assimilated. Silly me, I thought a Domestic Bond fund invested in Domestic Bonds. Not protesting too much as I have owned International Bond funds for years. It is just that the US/Foreign categories have been muddied up a bit, US Funds own Foreign Bonds and Foreign Bond Funds own US Bonds. We really are in a global economy now.
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Re: I’m still not a fan of international bond funds

Post by abuss368 »

I am curious how much of Total International Bond Fund is direct investment and not indirect from the Target and LifeStrategy funds.
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Re: I’m still not a fan of international bond funds

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abuss368 wrote: Tue May 07, 2019 6:28 pm I am curious how much of Total International Bond Fund is direct investment and not indirect from the Target and LifeStrategy funds.
The Admiral Share Class of the Total International Bond Fund shows $48.1 Billion. We know Vanguard does not use Admiral Share Class funds in their Target Date and LifeStrategy Funds.
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Re: I’m still not a fan of international bond funds

Post by abuss368 »

Outafter20 wrote: Tue May 07, 2019 8:53 pm
abuss368 wrote: Tue May 07, 2019 6:28 pm I am curious how much of Total International Bond Fund is direct investment and not indirect from the Target and LifeStrategy funds.
The Admiral Share Class of the Total International Bond Fund shows $48.1 Billion. We know Vanguard does not use Admiral Share Class funds in their Target Date and LifeStrategy Funds.
That is much more than I would have expected. This asset class must be much more popular than years ago. I can only speculate that Vanguard’s PAS services have impacted as well.
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Re: I’m still not a fan of international bond funds

Post by abuss368 »

This has been a good thread in reviewing the responses over the past couple of years. Since the thread was started, the yield of Total International Bond is now 0.48%.
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Re: I’m still not a fan of international bond funds

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abuss368 wrote: Fri May 08, 2020 12:47 pm This has been a good thread in reviewing the responses over the past couple of years. Since the thread was started, the yield of Total International Bond is now 0.48%.
Considering their low yield, what do you think has led to international bonds outperformance of the TBM since their inception on 6/28/2013 (BNDX) with vanguard?
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Re: I’m still not a fan of international bond funds

Post by abuss368 »

spdoublebass wrote: Fri May 08, 2020 1:44 pm
abuss368 wrote: Fri May 08, 2020 12:47 pm This has been a good thread in reviewing the responses over the past couple of years. Since the thread was started, the yield of Total International Bond is now 0.48%.
Considering their low yield, what do you think has led to international bonds outperformance of the TBM since their inception on 6/28/2013 (BNDX) with vanguard?
That is the $6 million dollar question! I am not sure.

Perhaps Rick Ferri will see this thread revived and may be able to better explain that.
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Re: I’m still not a fan of international bond funds

Post by abuss368 »

Rick Ferri wrote: Fri Apr 20, 2018 6:47 pm I’ve never been a big fan of international bond funds (see my “All About Asset Allocation” book and other posts I’ve made here in the past). They have higher fees than comparable US bond funds and hedging currency adds another hidden layer of cost. On top of that, at the present time, the yields stink! Vanguard’s BNDX (Int’) is at 0.8% SEC today while BND (US) is at 3.0%.

Vanguard talks about the *potential* for diversification. It’s not enough to peak my interest. Whatever benefit there *might* be from future low correlation isn’t going to make up the higher expense or lower yield. Maybe it did in the past, but not now.

A diversified fixed income strategy does not need a hedged developed market international bond fund.

Rick Ferri
Incredible how yields have declined further since Rick started this excellent thread! Rick’s simple and effective strategy (to borrow a phrase from Apple) “Just works”.

Adding international bonds to a portfolio complicates strategy. More rebalancing, more monitoring, more complexity, without a possible material impact to the portfolio.

I’ll pass.
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

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abuss368 wrote: Mon Oct 26, 2020 6:33 pm
Rick Ferri wrote: Fri Apr 20, 2018 6:47 pm I’ve never been a big fan of international bond funds (see my “All About Asset Allocation” book and other posts I’ve made here in the past). They have higher fees than comparable US bond funds and hedging currency adds another hidden layer of cost. On top of that, at the present time, the yields stink! Vanguard’s BNDX (Int’) is at 0.8% SEC today while BND (US) is at 3.0%.

Vanguard talks about the *potential* for diversification. It’s not enough to peak my interest. Whatever benefit there *might* be from future low correlation isn’t going to make up the higher expense or lower yield. Maybe it did in the past, but not now.

A diversified fixed income strategy does not need a hedged developed market international bond fund.

Rick Ferri
Incredible how yields have declined further since Rick started this excellent thread! Rick’s simple and effective strategy (to borrow a phrase from Apple) “Just works”.

Adding international bonds to a portfolio complicates strategy. More rebalancing, more monitoring, more complexity, without a possible material impact to the portfolio.

I’ll pass.
I think you are missing the word Hedged in your statement.

You asked a similar question yesterday in the Dalio thread. Nedsaid replied back to you in that thread.

Mr. Ferri said "A diversified fixed income strategy does not need a hedged developed market international bond fund.

You are not saying the same thing as Mr. Ferri because you are lumping Hedged and Unhedged International bonds into the same category.
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Re: I’m still not a fan of international bond funds

Post by 000 »

Loaning to foreign (to you) sovereigns seems pretty silly to me...

People would be well advised to lookup "sovereign immunity" before buying an international bond fund.
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Re: I’m still not a fan of international bond funds

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000 wrote: Mon Oct 26, 2020 7:02 pm Loaning to foreign (to you) sovereigns seems pretty silly to me...

People would be well advised to lookup "sovereign immunity" before buying an international bond fund.
That is interesting and please continue explaining!
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Re: I’m still not a fan of international bond funds

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abuss368 wrote: Mon Oct 26, 2020 7:46 pm
000 wrote: Mon Oct 26, 2020 7:02 pm Loaning to foreign (to you) sovereigns seems pretty silly to me...

People would be well advised to lookup "sovereign immunity" before buying an international bond fund.
That is interesting and please continue explaining!
A Sovereign cannot be sued in his own courts because he created them.

A fiat monetary Sovereign can also do absolutely anything he wishes regarding the supply of his currency.

Which investor is likely to get higher preference in the Sovereign's policies... his own subjects? Or retail investor aliens?
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Re: I’m still not a fan of international bond funds

Post by abuss368 »

000 wrote: Mon Oct 26, 2020 8:03 pm
abuss368 wrote: Mon Oct 26, 2020 7:46 pm
000 wrote: Mon Oct 26, 2020 7:02 pm Loaning to foreign (to you) sovereigns seems pretty silly to me...

People would be well advised to lookup "sovereign immunity" before buying an international bond fund.
That is interesting and please continue explaining!
A Sovereign cannot be sued in his own courts because he created them.

A fiat monetary Sovereign can also do absolutely anything he wishes regarding the supply of his currency.

Which investor is likely to get higher preference in the Sovereign's policies... his own subjects? Or retail investor aliens?
This is an excellent reminder. Have you read David Swensen’s “Unconventional Success”? Dr. Swensen had an entire section regarding international bonds and why he thought they should be avoided. He referred to it as “alignment of interests”. Essentially the interests of an investor buying a foreign bonds are not aligned (or considered) should that country default (or consider not paying). In addition, a country would try to avoid defaulting when the holders of the bonds are it’s own citizenship.
Last edited by abuss368 on Mon Oct 26, 2020 8:33 pm, edited 1 time in total.
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Re: I’m still not a fan of international bond funds

Post by 000 »

abuss368 wrote: Mon Oct 26, 2020 8:24 pm This is an excellent reminder. Have you read David Swensen’s “Unconventional Success”? Dr. Swensen had an entire section regarding international bonds and why he thought they should be avoided. He referred to it as “alignment of interests”. Essentially the interests of an investor buying a foreign bonds are not aligned (or considered) should that country default (or consider not paying). In addition, a country would to to avoid defaulting when the holders of the bonds are it’s own citizenship.
I have not read that book, but I agree with the general idea you summarized. Additionally, a government will likely pursue a monetary policy (inflation vs. deflation) that it thinks best for its own interests, which does not seem closely related with a foreign investor's consumption in real terms.
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Re: I’m still not a fan of international bond funds

Post by abuss368 »

000 wrote: Mon Oct 26, 2020 8:30 pm
abuss368 wrote: Mon Oct 26, 2020 8:24 pm This is an excellent reminder. Have you read David Swensen’s “Unconventional Success”? Dr. Swensen had an entire section regarding international bonds and why he thought they should be avoided. He referred to it as “alignment of interests”. Essentially the interests of an investor buying a foreign bonds are not aligned (or considered) should that country default (or consider not paying). In addition, a country would to to avoid defaulting when the holders of the bonds are it’s own citizenship.
I have not read that book, but I agree with the general idea you summarized. Additionally, a government will likely pursue a monetary policy (inflation vs. deflation) that it thinks best for its own interests, which does not seem closely related with a foreign investor's consumption in real terms.
Totally agree re: inflation. Jack Bogle often said: I live in the US, work in the US, save and invest in the US, and spend in the US. What does it matter what the inflation rate of South Africa, Saudi Arabia, or Taiwan matter to a US investor?
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Re: I’m still not a fan of international bond funds

Post by Northern Flicker »

abuss368 wrote: Fri May 08, 2020 1:55 pm
spdoublebass wrote: Fri May 08, 2020 1:44 pm
abuss368 wrote: Fri May 08, 2020 12:47 pm This has been a good thread in reviewing the responses over the past couple of years. Since the thread was started, the yield of Total International Bond is now 0.48%.
Considering their low yield, what do you think has led to international bonds outperformance of the TBM since their inception on 6/28/2013 (BNDX) with vanguard?
That is the $6 million dollar question! I am not sure.

Perhaps Rick Ferri will see this thread revived and may be able to better explain that.
Hedge contract return (above and beyond the currency fluctuation component) includes a short rate return which is the difference in the prevailing short rates between the two currencies at the point on the yield curve corresponsing to the term of the forward hedge contract.

If the 30-day rate for USD were 2% and the 30-day rate for UKP were 1% then a 30-day forward contract to hedge UKP back to USD would hsve a hedge return of 1% annualized, above and beyond the maturity value of the contract that takes into account the currency fluctuations. This enhances or detracts from the de facto yield, as it can be positive or negative.

During the time VTABX/BNDX had good returns, US short rates had risen above zero while non-US rates fell to close to zero. The hedge contract return and falling non-US rates were driving the return of the fund.

That headwind is gone with US short rates near zero.
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