Vanguard International Bonds

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Vanguard International Bonds

Post by abuss368 »

So I have not looked at Vanguard's Portfolio Analyzer tool in a while. However, I noticed today that the tool will still tell the investor that they could benefit from a 30% of bond allocation to International Bonds.

My question is why is Vanguard marketing international bonds when their own research is spotty at best for including the bonds?

The yield appears to be low but becomes more in line with US Total Bond at year end. It was my understanding that the additional yield is not related to the underlying bonds but rather the currency hedging?

I read some additional information that after this many years, the majority of Total International Bonds assets is from the allocation of the Target and LifeStrategy funds.

Interesting! How many Bogleheads actually buy this fund and include in their portfolio or simply ignore? Have your thoughts changed over the years?

In my opinion one low cost and diversified short or intermediate investment grade bond fund will provide safety and income. Total Bond, Treasuries, etc will do this.
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Re: Vanguard International Bonds

Post by 000 »

I don't hold them and I definitely don't see the point of hedged international bonds.

If USD were to have problems, wouldn't I want bonds in other currencies??

A hit and a miss from Vanguard in my opinion.
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Re: Vanguard International Bonds

Post by L82GAME »

Allan Roth’s view on international bonds is unfavorable due primarily to foreign currency risk. However, my PIL are invested in the VG Lifestrategy Conservative growth fund which includes them (17.9%). Can’t always find perfection, low cost and super simple in the same package...
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Re: Vanguard International Bonds

Post by index245 »

I don't think it will affect long term returns. I own Lifestrategy Moderate Growth (11% international bonds).

To be cynical and honest, I think the reason is marketing. Vanguard is marketing their products and funds to the world, not just US-based investors. This allows all Target and Lifestrategy funds to be truly global in terms of stocks and bonds.

That being said, I think they are good funds (overall, not perfect) and keep me from tinkering. I'll pay them a small fee (.06%) to handle rebalancing.
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Re: Vanguard International Bonds

Post by abuss368 »

L82GAME wrote: Tue Sep 08, 2020 7:39 pm Allan Roth’s view on international bonds is unfavorable due primarily to foreign currency risk. However, my PIL are invested in the VG Lifestrategy Conservative growth fund which includes them (17.9%). Can’t always find perfection, low cost and super simple in the same package...
Vanguard’s fund is currency hedged. Jack Bogle did say international bonds were unappealing.
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Re: Vanguard International Bonds

Post by columbia »

Shouldn't this fund be named Developed Markets Bond?
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Re: Vanguard International Bonds

Post by Alchemist »

I do not want Italian and Spanish bonds anywhere near my "safe" holdings. They make up 14% of this fund.
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Re: Vanguard International Bonds

Post by racy »

abuss368 wrote: Tue Sep 08, 2020 7:32 pm ...My question is why is Vanguard marketing international bonds when their own research is spotty at best for including the bonds?...
Because they are two different departments. It's like the car dealerships. You'll hear how great some new feature of the car is from the sales people. But, you'll hear how troublesome it is from the service department. :wink:
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Re: Vanguard International Bonds

Post by abuss368 »

columbia wrote: Wed Sep 09, 2020 6:00 am Shouldn't this fund be named Developed Markets Bond?
Perhaps that is a more fitting description. I believe there are some emerging market bonds in this fund however.
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Re: Vanguard International Bonds

Post by spdoublebass »

abuss368 wrote: Tue Sep 08, 2020 7:32 pm So I have not looked at Vanguard's Portfolio Analyzer tool in a while.

If you do look I think you'll find your answer.
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Re: Vanguard International Bonds

Post by abuss368 »

spdoublebass wrote: Thu Sep 10, 2020 4:45 am
abuss368 wrote: Tue Sep 08, 2020 7:32 pm So I have not looked at Vanguard's Portfolio Analyzer tool in a while.

If you do look I think you'll find your answer.
So you invest in international bonds?
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Re: Vanguard International Bonds

Post by spdoublebass »

abuss368 wrote: Thu Sep 10, 2020 6:03 am
spdoublebass wrote: Thu Sep 10, 2020 4:45 am
abuss368 wrote: Tue Sep 08, 2020 7:32 pm So I have not looked at Vanguard's Portfolio Analyzer tool in a while.

If you do look I think you'll find your answer.
So you invest in international bonds?
In your OP that wasn't the question.

Are you asking who invests in International Bonds or are you asking why Vanguard markets them?
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Re: Vanguard International Bonds

Post by abuss368 »

spdoublebass wrote: Thu Sep 10, 2020 6:07 am
abuss368 wrote: Thu Sep 10, 2020 6:03 am
spdoublebass wrote: Thu Sep 10, 2020 4:45 am
abuss368 wrote: Tue Sep 08, 2020 7:32 pm So I have not looked at Vanguard's Portfolio Analyzer tool in a while.

If you do look I think you'll find your answer.
So you invest in international bonds?
In your OP that wasn't the question.

Are you asking who invests in International Bonds or are you asking why Vanguard markets them?
Do you personally invest in Total International Bond fund and why (or why not)?
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Re: Vanguard International Bonds

Post by galeno »

We are non-USA investors. Our current FI allocation is 90% USD / USA domiciled investment grade bonds.

30% TIPS + 30% Corps + 30 % US Treas + 10% CASH.

At some point we will go 90% USD hedged world bonds (42% USD + 24% Euro + 37% the rest). Diversification is the only free lunch in investing.

80% Dev World bonds + 10% EM bonds + 10% USD cash.
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Re: Vanguard International Bonds

Post by rixer »

I have International Bonds in my lifestrategy fund. I probably wouldn't buy it if it wasn't in there. That said, it's not worth bailing because of it. I enjoy the simplicity of the fund and it is supposed to add more diversity to the portfolio so I'll have to hope it works out. I know nothing....
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Re: Vanguard International Bonds

Post by Spinola »

Alchemist wrote: Wed Sep 09, 2020 6:07 am I do not want Italian and Spanish bonds anywhere near my "safe" holdings. They make up 14% of this fund.
Because somehow Italy's staggering 2.5 trillion Euros in debt is more concerning than the US's trivial 26.7 trillion $ in debt? :mrgreen:
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Re: Vanguard International Bonds

Post by tibbitts »

abuss368 wrote: Thu Sep 10, 2020 8:41 am
Do you personally invest in Total International Bond fund and why (or why not)?
Not the person you directed the question to, but I do, although not as much as in emerging market bonds. If there's a fairly low-cost way to invest in an asset class (and it seems that international bonds are distinct from domestic, even with hedging) then it's difficult to justify not investing in it. I can't really justify not investing at closer to market weight either, but try to compromise with owning at least some.
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Re: Vanguard International Bonds

Post by Alchemist »

Edited to add: My comments below on how government funding / deficits work are completely incorrect and were based on a misunderstanding of macroeconomics. For further information on this incorrect view (MMT), please see the below academic paper correcting these views via the mainstream economic models:

https://docplayer.net/5083818-A-critiqu ... -mmt.html

I apologize for any misinformation about economic models I contributed to with my incorrect statements on this issue.

Spinola wrote: Fri Sep 11, 2020 7:41 pm
Alchemist wrote: Wed Sep 09, 2020 6:07 am I do not want Italian and Spanish bonds anywhere near my "safe" holdings. They make up 14% of this fund.
Because somehow Italy's staggering 2.5 trillion Euros in debt is more concerning than the US's trivial 26.7 trillion $ in debt? :mrgreen:
It is quite different. Italy has no control over the currency or interest rates in which it owes that debt. Italy's 160% debt to GDP is far more concerning than Japan's 240% debt to GDP ratio because unlike Japan (or the United States at 106% debt to GDP), Italy is not a currency Sovereign. It cannot adjust interest rates on its own bonds nor can it create new currency QE-style to simply monetize part/all of the deficit. Thus it, unlike the United States, is in real danger of involuntary default.

For both the U.S. and Japan, the largest holders of their bonds are.....their own governments.

Nations that control and issue bonds in their own currency can never default. They can cause inflation if this ability is taken too far, but that is a completely different problem from a financial collapse brought on by sovereign default.

If Italy finds itself in a Greece-like situation (and it is steaming there full speed), it will cause a financial crisis across the Eurozone an order of magnitude larger than Greece did due to its far larger debt/economy size. The Eurozone nations will face a choice of a financial crisis that wrecks their entire banking sector, or bailing out Italy either via direct government-to-government loans (ala Greek bailout) or by allowing the ECB to simply print enough Euro's to soak up Italy's debt. None of these are good outcomes and they will certainly be accompanied by brinkmanship between those nations sympathetic to Italy's plight and those who wish to punish countries they see as irresponsible. Again, see Greek debt crisis or more recently the Coronavirus relief plan compromise.

Italy is not the only Eurozone nation on such a trajectory, though it is the largest. This is why I want *nothing* to do with Eurozone bonds (aside from the terrible yields).
Last edited by Alchemist on Fri Nov 27, 2020 10:49 pm, edited 2 times in total.
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Re: Vanguard International Bonds

Post by 000 »

Alchemist wrote: Fri Sep 11, 2020 9:36 pm
Spinola wrote: Fri Sep 11, 2020 7:41 pm
Alchemist wrote: Wed Sep 09, 2020 6:07 am I do not want Italian and Spanish bonds anywhere near my "safe" holdings. They make up 14% of this fund.
Because somehow Italy's staggering 2.5 trillion Euros in debt is more concerning than the US's trivial 26.7 trillion $ in debt? :mrgreen:
It is quite different. Italy has no control over the currency or interest rates in which it owes that debt. Italy's 160% debt to GDP is far more concerning than Japan's 240% debt to GDP ratio because unlike Japan (or the United States at 106% debt to GDP), Italy is not a currency Sovereign. It cannot adjust interest rates on its own bonds nor can it create new currency QE-style to simply monetize part/all of the deficit. Thus it, unlike the United States, is in real danger of involuntary default.

For both the U.S. and Japan, the largest holders of their bonds are.....their own governments.

Nations that control and issue bonds in their own currency can never default. They can cause inflation if this ability is taken too far, but that is a completely different problem from a financial collapse brought on by sovereign default.

If Italy finds itself in a Greece-like situation it (and it is steaming there full speed), it will cause a financial crisis across the Eurozone an order of magnitude larger than Greece did due to its far larger debt/economy size. The Eurozone nations will face a choice of a financial crisis that wrecks their entire banking sector, or bailing out Italy either via direct government-to-government loans (ala Greek bailout) or by allowing the ECB to simply print enough Euro's to soak up Italy's debt.

Italy is not the only Eurozone nation on such a trajectory, though it is the largest. This is why I want *nothing* to do with Eurozone bonds (aside from the terrible yields).
You'd rather own bonds the issuer can inflate away than ones they can't?

Wild stuff.
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Re: Vanguard International Bonds

Post by Alchemist »

Edited to add: My comments below on how government funding / deficits work are completely incorrect and were based on a misunderstanding of macroeconomics. For further information on this incorrect view (MMT), please see the below academic paper correcting these views via the mainstream economic models:

https://docplayer.net/5083818-A-critiqu ... -mmt.html

I apologize for any misinformation about economic models I contributed to with my incorrect statements on this issue.

000 wrote: Fri Sep 11, 2020 9:38 pm You'd rather own bonds the issuer can inflate away than ones they can't?

Wild stuff.
There is a lot of room to print money before inflation arrives. Again, look at Japan, the UK or current QE in the United States. Deflation is the real risk in the near/mid term.

Also 'inflate away' the debt is looking at it the wrong way. A currency sovereign that issues a bond is really just issuing an interest bearing version of its currency. Treasuries are just dollars that provide some level of interest. They are not really "debt" in any meaningful sense of the word. And yes this implies issuing treasuries is akin to printing money regardless of QE or no-QE. Treasuries can play vital roles in the market that have nothing to do with being debt for the government.

For a currency sovereign, its budget does not work like a household budget.

A bond issued by a nation that does not control its own currency or one that borrow's in a foreign currency like an EM country issuing dollar-denominated bonds really is taking on debt it has to repay in a normal household-budget like sense. This raises the far higher risk of default vs simply running inflation a bit too hot.
Last edited by Alchemist on Fri Nov 27, 2020 10:50 pm, edited 1 time in total.
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Re: Vanguard International Bonds

Post by 000 »

Alchemist wrote: Fri Sep 11, 2020 9:46 pm
000 wrote: Fri Sep 11, 2020 9:38 pm You'd rather own bonds the issuer can inflate away than ones they can't?

Wild stuff.
There is a lot of room to print money before inflation arrives. Again, look at Japan, the UK or current QE in the United States. Deflation is the real risk in the near/mid term.

Also 'inflate away' the debt is looking at it the wrong way. A currency sovereign that issues a bond is really just issuing an interest bearing version of its currency. Treasuries are just dollars that provide some level of interest. They are not really "debt" in any meaningful sense of the word. And yes this implies issuing treasuries is akin to printing money regardless of QE or no-QE. Treasuries can play vital roles in the market that have nothing to do with being debt for the government.

For a currency sovereign, its budget does not work like a household budget.

A bond issued by a nation that does not control its own currency or one that borrow's in a foreign currency like an EM country issuing dollar-denominated bonds really is taking on debt it has to repay in a normal household-budget like sense. This raises the far higher risk of default vs simply running inflation a bit too hot.
There's been plenty of inflation in the US. Housing, healthcare, and higher education come to mind.

Debt is debt. Eventually it has to be either paid back or defaulted on.
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Re: Vanguard International Bonds

Post by jeffyscott »

abuss368 wrote: Wed Sep 09, 2020 8:24 am
columbia wrote: Wed Sep 09, 2020 6:00 am Shouldn't this fund be named Developed Markets Bond?
Perhaps that is a more fitting description. I believe there are some emerging market bonds in this fund however.
About 4% according to Vanguard.

It's limited to investment grade, not limited to developed markets. I guess few emerging market bonds are investment grade and/or they just issue less debt. Vanguard Emerging Market Government Bond Index is about 58% investment grade, FWIW.
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Re: Vanguard International Bonds

Post by Spinola »

Alchemist wrote: Fri Sep 11, 2020 9:36 pm
Spinola wrote: Fri Sep 11, 2020 7:41 pm
Alchemist wrote: Wed Sep 09, 2020 6:07 am I do not want Italian and Spanish bonds anywhere near my "safe" holdings. They make up 14% of this fund.
Because somehow Italy's staggering 2.5 trillion Euros in debt is more concerning than the US's trivial 26.7 trillion $ in debt? :mrgreen:
It is quite different. Italy has no control over the currency or interest rates in which it owes that debt. Italy's 160% debt to GDP is far more concerning than Japan's 240% debt to GDP ratio because unlike Japan (or the United States at 106% debt to GDP), Italy is not a currency Sovereign. It cannot adjust interest rates on its own bonds nor can it create new currency QE-style to simply monetize part/all of the deficit. Thus it, unlike the United States, is in real danger of involuntary default.
Don't these concerns apply to corporate and municipal bonds also? Should we avoid those also for the same reasons or are they somehow different? I am not advocating anyone buy Italian bonds, nor am I against, just trying to follow the logic.
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Re: Vanguard International Bonds

Post by abuss368 »

No one knows. What we do know is diversification is the only "free lunch" in investing.
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Re: Vanguard International Bonds

Post by luckyducky99 »

000 wrote: Fri Sep 11, 2020 10:09 pm Debt is debt. Eventually it has to be either paid back or defaulted on.
Technically this is true. But with respect to sovereign debt it's kind of irrelevant from the perspective of an individual investor.

A country borrowing in its own currency can roll debt over in perpetuity. If you believe that the centuries-long history of interest rates declining will continue, it will get cheaper and cheaper to do so. If you believe GDP growth will continue, the relative cost of continuing to borrow goes down too.

Eventually a country will fail, or some of the above premises may flip, but I'm betting (literally, with my money in these bonds) that any of those are well past my timeframe.
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Re: Vanguard International Bonds

Post by luckyducky99 »

Spinola wrote: Sat Sep 12, 2020 11:53 am
Alchemist wrote: Fri Sep 11, 2020 9:36 pm
Spinola wrote: Fri Sep 11, 2020 7:41 pm
Alchemist wrote: Wed Sep 09, 2020 6:07 am I do not want Italian and Spanish bonds anywhere near my "safe" holdings. They make up 14% of this fund.
Because somehow Italy's staggering 2.5 trillion Euros in debt is more concerning than the US's trivial 26.7 trillion $ in debt? :mrgreen:
It is quite different. Italy has no control over the currency or interest rates in which it owes that debt. Italy's 160% debt to GDP is far more concerning than Japan's 240% debt to GDP ratio because unlike Japan (or the United States at 106% debt to GDP), Italy is not a currency Sovereign. It cannot adjust interest rates on its own bonds nor can it create new currency QE-style to simply monetize part/all of the deficit. Thus it, unlike the United States, is in real danger of involuntary default.
Don't these concerns apply to corporate and municipal bonds also? Should we avoid those also for the same reasons or are they somehow different? I am not advocating anyone buy Italian bonds, nor am I against, just trying to follow the logic.
They do apply, but you should be getting compensated more for that risk. I think the point is to realize that the risk is there, and understand the tradeoff you're making. I.e. Italian government bonds are not risk-free in the same way as US treasuries.

10 year treasuries yield like .65% right now. Italian 10 year government bonds yield 1.0%. Investment grade intermediate corporates yield like 1.5%.
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Re: Vanguard International Bonds

Post by AlwaysLearningMore »

Dr. Wm. Bernstein addressed international bonds in this interview: https://tinyurl.com/y6qp4fr9

ETF.com: One thing that puzzled me is that among your recommendations, I don’t see an international bond fund as part of the allocation—even one that’s currency-hedged. Why?

Bernstein: Well, first, there is absolutely no way any rational investor would want an unhedged international bond fund in their portfolio for a very simple reason: Your bonds are your “safe” assets. They are what you are defeasing your retirement with; they are what enables you to sleep at night; they are your liquidity for when you lose your job or for when you want to buy cheap equities or the corner lot from your neighbor who got caught in a liquidity squeeze.

And the unhedged currency exposure with unhedged international bonds is very risky. All you have to do is look to what happened to the euro and the yen in the last crisis—they cratered. That’s a risk you simply don’t want to take.

Now, when you have hedged currency risk as opposed to unhedged currency risk in a bond fund, you’ve got a smaller problem, but it’s still a problem. And that’s when you take foreign sovereign bonds and hedge them back to the dollar—you’ve basically got U.S. bonds.

Maybe you get a tiny bit of extra diversification, but it’s a trivial amount—plus you’re paying higher expenses and higher transactional costs to deal with foreign bonds. (emphasis added)

ETF.com: So, to take this back to your basic recommendation in “If You Can,” it’s that you don’t need BNDX—which is a currency-hedged international aggregate bond fund, because of negligible diversification and transaction costs? And you’re basically fine with a U.S. aggregate bond fund like BND?

Bernstein: Yes, owning a currency-hedged bond international fund is just basically getting into slightly more expensive U.S. bond exposure. (emphasis added)
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Re: Vanguard International Bonds

Post by nedsaid »

Alchemist wrote: Fri Sep 11, 2020 9:46 pm
000 wrote: Fri Sep 11, 2020 9:38 pm You'd rather own bonds the issuer can inflate away than ones they can't?

Wild stuff.
There is a lot of room to print money before inflation arrives. Again, look at Japan, the UK or current QE in the United States. Deflation is the real risk in the near/mid term.

Also 'inflate away' the debt is looking at it the wrong way. A currency sovereign that issues a bond is really just issuing an interest bearing version of its currency. Treasuries are just dollars that provide some level of interest. They are not really "debt" in any meaningful sense of the word. And yes this implies issuing treasuries is akin to printing money regardless of QE or no-QE. Treasuries can play vital roles in the market that have nothing to do with being debt for the government.

For a currency sovereign, its budget does not work like a household budget.

A bond issued by a nation that does not control its own currency or one that borrow's in a foreign currency like an EM country issuing dollar-denominated bonds really is taking on debt it has to repay in a normal household-budget like sense. This raises the far higher risk of default vs simply running inflation a bit too hot.
This is an excellent post. Alchemist has summarized in 4 short paragraphs what it took me many posts to say. I agree that Treasuries are simply interest bearing dollars and really don't finance anything, the government could simply issue zero interest currency in lieu of debt. The national debt provides a safe haven for savers, helps target interest rates, and provides support for the currency itself. Interest rates on the debt are a factor in the value of the US Dollar.
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Re: Vanguard International Bonds

Post by nedsaid »

Back to the topic, my take on this fund is that it probably won't hurt your portfolio and it might help it a little. The credit quality is high, everything is hedged back into dollars, so your risk isn't that much. You might achieve a mild diversification benefit from this fund. It is hard for me to ignore International Bonds, the largest asset class in the world. So I do own International Bonds but much less than the 40% of a bond portfolio that Vanguard recommends. Approximately 12% of my bonds are International.
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Re: Vanguard International Bonds

Post by Alchemist »

Edited to add: My comments below on how government funding / deficits work are completely incorrect and were based on a misunderstanding of macroeconomics. For further information on this incorrect view (MMT), please see the below academic paper correcting these views via the mainstream economic models:

https://docplayer.net/5083818-A-critiqu ... -mmt.html

I apologize for any misinformation about economic models I contributed to with my incorrect statements on this issue.

Spinola wrote: Sat Sep 12, 2020 11:53 am Don't these concerns apply to corporate and municipal bonds also? Should we avoid those also for the same reasons or are they somehow different? I am not advocating anyone buy Italian bonds, nor am I against, just trying to follow the logic.
Yes this also applies to corporate and municipal bonds. It means you should evaluate them in a different light than national government bonds from currency sovereigns. For instance bonds from the UK, Japan, Australia, or the United States national governments can be seen as equivalent on the issue of default risk. Currency/inflation is the risk you should be worried about with these, not default. While Eurozone, municipal, corporate debt, and EM bonds (who borrow in foreign currency) should be set in a separate category of non-currency sovereigns that still includes currency/inflation risk but now also includes involuntary default as a risk as well.

My point was not necessarily to avoid all non-treasuries bonds, rather it was to explain to 000 why I found Italy's national debt more concerning than the U.S. or Japan's.

Some may still want to buy Italian government bonds, I only want them to be doing so while fully knowing the risks and how they compare to alternatives.
nedsaid wrote: Sat Sep 12, 2020 4:11 pm This is an excellent post. Alchemist has summarized in 4 short paragraphs what it took me many posts to say. I agree that Treasuries are simply interest bearing dollars and really don't finance anything, the government could simply issue zero interest currency in lieu of debt. The national debt provides a safe haven for savers, helps target interest rates, and provides support for the currency itself. Interest rates on the debt are a factor in the value of the US Dollar.
Thank you for the kind words! It is good to know I am not just yelling into the void.
Last edited by Alchemist on Fri Nov 27, 2020 10:50 pm, edited 1 time in total.
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Re: Vanguard International Bonds

Post by Robot Monster »

Alchemist wrote: Sat Sep 12, 2020 10:27 pm My point was not necessarily to avoid all non-treasuries bonds, rather it was to explain to 000 why I found Italy's national debt more concerning than the U.S. or Japan's.
It would be nice to think you don't need a PhD in economics in order to evaluate these things. Is the disparity in risk between Japan and Italy not shown in the "Distribution by credit quality" of BNDX? That is, after all, the place most investors would look to understand the credit risk of the fund they're investing in. 28.2% of BNDX is Baa vs 21% of BND; just from that information we know those funds are riskier than Treasuries. But perhaps this is not telling the full story, or...?
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Re: Vanguard International Bonds

Post by Valuethinker »

Alchemist wrote: Sat Sep 12, 2020 10:27 pm
Spinola wrote: Sat Sep 12, 2020 11:53 am Don't these concerns apply to corporate and municipal bonds also? Should we avoid those also for the same reasons or are they somehow different? I am not advocating anyone buy Italian bonds, nor am I against, just trying to follow the logic.
Yes this also applies to corporate and municipal bonds. It means you should evaluate them in a different light than national government bonds from currency sovereigns. For instance bonds from the UK, Japan, Australia, or the United States national governments can be seen as equivalent on the issue of default risk. Currency/inflation is the risk you should be worried about with these, not default. While Eurozone, municipal, corporate debt, and EM bonds (who borrow in foreign currency) should be set in a separate category of non-currency sovereigns that still includes currency/inflation risk but now also includes involuntary default as a risk as well.

My point was not necessarily to avoid all non-treasuries bonds, rather it was to explain to 000 why I found Italy's national debt more concerning than the U.S. or Japan's.

Some may still want to buy Italian government bonds, I only want them to be doing so while fully knowing the risks and how they compare to alternatives.
nedsaid wrote: Sat Sep 12, 2020 4:11 pm This is an excellent post. Alchemist has summarized in 4 short paragraphs what it took me many posts to say. I agree that Treasuries are simply interest bearing dollars and really don't finance anything, the government could simply issue zero interest currency in lieu of debt. The national debt provides a safe haven for savers, helps target interest rates, and provides support for the currency itself. Interest rates on the debt are a factor in the value of the US Dollar.
Thank you for the kind words! It is good to know I am not just yelling into the void.
It was an excellent, clear and elegant explanation.

At some point in your life you might well have been a teacher. Or at least someone who turns lead into gold ;-).
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Re: Vanguard International Bonds

Post by Valuethinker »

Spinola wrote: Fri Sep 11, 2020 7:41 pm
Alchemist wrote: Wed Sep 09, 2020 6:07 am I do not want Italian and Spanish bonds anywhere near my "safe" holdings. They make up 14% of this fund.
Because somehow Italy's staggering 2.5 trillion Euros in debt is more concerning than the US's trivial 26.7 trillion $ in debt? :mrgreen:
Alchemist has taken you through the differences.

But there is another set of issues. Italy has:

- a much lower bond yield than it probably would in the absence of Quantitative Easing by the European Central Bank. The German government bond market, freely held, is now quite small and that squeezes Eurozone bond investors (especially insurance companies and banks) into owning higher risk bonds (rather than negative yielding bonds, which would play havoc with Solvency Ratios etc, I suspect).

In Europe you have big savers and not a huge pool of assets - stock markets are less valuable (relative to GDP) than in the US or UK case. Government bond markets are constrained as above. Corporate debt markets are also smaller. There's no meaningful Agency bond market - although there are Covered Bonds and the Pfandbriefe is over 1 trillion Euros.

- a relatively high level of taxation to GDP. The US for example has no VAT (alone among developed nations). We could argue about whether it ever will (politics discussion) but it's not like Italy can easily raise its 20% (?) level. Italy has ferocious social security taxes leading to high labour costs and labour market inflexibility.

- much worse demographics than USA. Without big immigration of young people Italy is in trouble. Yet young Italians (still) come to London to work because the job market is so much better.

- stagnant GDP growth.

- a banking system which is quite weak and still dealing with the effects of the 2008 Crash. The Italian banking system is a slow motion train crash, as far as I can work out. Many weak institutions which need to be merged or wound up.

Italy's success industries managed to be the ones worst hit in many cases, post 2000 ish, by Chinese competition (footwear, textiles etc). It has less of the sort of high tech stuff that has thrived in Germany or for example BMW & Mercedes & Audi cars in China etc.

Italy is really quite a special case. One can certainly see positives: relatively high domestic savings rate (low consumer & corporate debt to GDP), the direct effects of the 2008 Crash were AFAIK relatively limited, dynamism adaptability of Italian companies, high quality products e.g. in engineering; influence of Italy on global food & culture. Italians I encounter are very well educated (in business, engineering, medicine etc)-- although I understand the school curriculum is criticised for being far too classical-leaning.

What one does about southern Italy is a problem which has stumped politicians and economists for decades. I do think Italy would benefit particularly well from a serious European effort to inflate the economy - the c 750 bn agreed strikes me as a bit of a band-aide. Just the green investment opportunities alone (solar plants in Sicily for example, with accompanying HVDC transmission systems to even north of the Alps).

We could argue (but not here!) whose politics are worse, or whether they are fundamentally similar, but the US has the advantage of a Federal system. States can, and do, make themselves more pro growth than the Federal government, for example. And the US workforce is much more geographically mobile than the EU-wide one.
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Re: Vanguard International Bonds

Post by invest4 »

nedsaid wrote: Sat Sep 12, 2020 4:19 pm Back to the topic, my take on this fund is that it probably won't hurt your portfolio and it might help it a little. The credit quality is high, everything is hedged back into dollars, so your risk isn't that much. You might achieve a mild diversification benefit from this fund. It is hard for me to ignore International Bonds, the largest asset class in the world. So I do own International Bonds but much less than the 40% of a bond portfolio that Vanguard recommends. Approximately 12% of my bonds are International.
Same. Like my equities, I have an 80/20 split between US and Intl Bonds.
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Re: Vanguard International Bonds

Post by abuss368 »

Robot Monster wrote: Sun Sep 13, 2020 8:19 am
Alchemist wrote: Sat Sep 12, 2020 10:27 pm My point was not necessarily to avoid all non-treasuries bonds, rather it was to explain to 000 why I found Italy's national debt more concerning than the U.S. or Japan's.
It would be nice to think you don't need a PhD in economics in order to evaluate these things. Is the disparity in risk between Japan and Italy not shown in the "Distribution by credit quality" of BNDX? That is, after all, the place most investors would look to understand the credit risk of the fund they're investing in. 28.2% of BNDX is Baa vs 21% of BND; just from that information we know those funds are riskier than Treasuries. But perhaps this is not telling the full story, or...?
I guess a little subjective but appears not much difference between 28% and 21%.
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Re: Vanguard International Bonds

Post by nedsaid »

Alchemist wrote: Sat Sep 12, 2020 10:27 pm
Spinola wrote: Sat Sep 12, 2020 11:53 am Don't these concerns apply to corporate and municipal bonds also? Should we avoid those also for the same reasons or are they somehow different? I am not advocating anyone buy Italian bonds, nor am I against, just trying to follow the logic.
Yes this also applies to corporate and municipal bonds. It means you should evaluate them in a different light than national government bonds from currency sovereigns. For instance bonds from the UK, Japan, Australia, or the United States national governments can be seen as equivalent on the issue of default risk. Currency/inflation is the risk you should be worried about with these, not default. While Eurozone, municipal, corporate debt, and EM bonds (who borrow in foreign currency) should be set in a separate category of non-currency sovereigns that still includes currency/inflation risk but now also includes involuntary default as a risk as well.

My point was not necessarily to avoid all non-treasuries bonds, rather it was to explain to 000 why I found Italy's national debt more concerning than the U.S. or Japan's.

Some may still want to buy Italian government bonds, I only want them to be doing so while fully knowing the risks and how they compare to alternatives.
nedsaid wrote: Sat Sep 12, 2020 4:11 pm This is an excellent post. Alchemist has summarized in 4 short paragraphs what it took me many posts to say. I agree that Treasuries are simply interest bearing dollars and really don't finance anything, the government could simply issue zero interest currency in lieu of debt. The national debt provides a safe haven for savers, helps target interest rates, and provides support for the currency itself. Interest rates on the debt are a factor in the value of the US Dollar.
Thank you for the kind words! It is good to know I am not just yelling into the void.
Just keep in mind that I am only right about anything around here about every 6 months or so. You can ignore everything else that I say here. So wait around until March 2021 or so, I will be right about something again! All kidding aside, it was an excellent post and Valuethinker thought so too.
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Re: Vanguard International Bonds

Post by Valuethinker »

abuss368 wrote: Tue Sep 08, 2020 7:32 pm So I have not looked at Vanguard's Portfolio Analyzer tool in a while. However, I noticed today that the tool will still tell the investor that they could benefit from a 30% of bond allocation to International Bonds.

My question is why is Vanguard marketing international bonds when their own research is spotty at best for including the bonds?

The yield appears to be low but becomes more in line with US Total Bond at year end. It was my understanding that the additional yield is not related to the underlying bonds but rather the currency hedging?

I read some additional information that after this many years, the majority of Total International Bonds assets is from the allocation of the Target and LifeStrategy funds.

Interesting! How many Bogleheads actually buy this fund and include in their portfolio or simply ignore? Have your thoughts changed over the years?

In my opinion one low cost and diversified short or intermediate investment grade bond fund will provide safety and income. Total Bond, Treasuries, etc will do this.
The argument, Swensen expresses it best but there is also a Vanguard paper, is that bonds of different markets have different shaped yield curves and different underlying interest rate cycles & real returns.

Thus even currency-hedged bonds provide diversification benefit. Swensen I think estimates it as up to 1% pa.

Certainly many non US developed country Investment Grade govt bond markets have higher default risk than the USA. So that's one thing arguing against such bonds. Unless you think the markets have understated the risk of US govt bond default.
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Re: Vanguard International Bonds

Post by Alchemist »

Edited to add: My comments below on how government funding / deficits work are completely incorrect and were based on a misunderstanding of macroeconomics. For further information on this incorrect view (MMT), please see the below academic paper correcting these views via the mainstream economic models:

https://docplayer.net/5083818-A-critiqu ... -mmt.html

I apologize for any misinformation about economic models I contributed to with my incorrect statements on this issue.

Robot Monster wrote: Sun Sep 13, 2020 8:19 am It would be nice to think you don't need a PhD in economics in order to evaluate these things. Is the disparity in risk between Japan and Italy not shown in the "Distribution by credit quality" of BNDX? That is, after all, the place most investors would look to understand the credit risk of the fund they're investing in. 28.2% of BNDX is Baa vs 21% of BND; just from that information we know those funds are riskier than Treasuries. But perhaps this is not telling the full story, or...?
Italian bonds are rated below Japanese and U.S. bonds, so that is somewhat captured there. What I think is misleading is that sovereign bond ratings do not take into account currency sovereign status. For instance, treasuries being 'downgraded' by S&P a few years ago is just kind of silly. I think the mortgage crisis should have destroyed the credibility of our ratings agencies barring massive reform but that is a rabbit hole all on its own.

Rather than the technical side, I think it is more a qualitative understanding necessary by investors of the differences between sovereign bonds and that countries are not apples to apples to compare on credit quality for reasons beyond credit rating. Hence 000 still not seeming to grasp the fundamental difference between Eurozone debt and currency sovereign bonds.

Italian bonds also come with a systemic risk not captured in the rating which Valuethinker does a great job of discussing. If Italy defaults, it could bring down the entire Eurozone banking system thus putting at risk bonds even of supposedly higher credit quality Eurozone countries. A disturbing 'rhyme' to the mortgage crisis when even highly rated CDO's went belly up in the conflagration.
Valuethinker wrote: Sun Sep 13, 2020 8:41 am It was an excellent, clear and elegant explanation.

At some point in your life you might well have been a teacher. Or at least someone who turns lead into gold ;-).
Thank you appreciating the post! I actually am a certified instructor in my career field though it is not my current primary duty. The only financial Alchemy I am attempting for now is to cause my current portfolio to transform into a larger portfolio in the future :moneybag
Last edited by Alchemist on Fri Nov 27, 2020 10:51 pm, edited 1 time in total.
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Re: Vanguard International Bonds

Post by 000 »

Alchemist wrote: Mon Sep 14, 2020 8:30 pm Italian bonds are rated below Japanese and U.S. bonds, so that is somewhat captured there. What I think is misleading is that sovereign bond ratings do not take into account currency sovereign status. For instance, treasuries being 'downgraded' by S&P a few years ago is just kind of silly. I think the mortgage crisis should have destroyed the credibility of our ratings agencies barring massive reform but that is a rabbit hole all on its own.

Rather than the technical side, I think it is more a qualitative understanding necessary by investors of the differences between sovereign bonds and that countries are not apples to apples to compare on credit quality for reasons beyond credit rating. Hence 000 still not seeming to grasp the fundamental difference between Eurozone debt and currency sovereign bonds.
I understand the fundamental difference but disagree on the question of safety. I don't think having the currency inflated away in order to "not default" makes the investment any safer, in fact it may increase the temptation to resort to inflation.
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Re: Vanguard International Bonds

Post by Alchemist »

Edited to add: My comments below based on how government funding / deficits work are completely incorrect and were based on a misunderstanding of macroeconomics. For further information on this incorrect view (MMT), please see the below academic paper correcting these views via the mainstream economic models:

https://docplayer.net/5083818-A-critiqu ... -mmt.html

I apologize for any misinformation about economic models I contributed to with my incorrect statements on this issue.


000 wrote: Mon Sep 14, 2020 8:44 pm I understand the fundamental difference but disagree on the question of safety. I don't think having the currency inflated away in order to "not default" makes the investment any safer, in fact it may increase the temptation to resort to inflation.
We will probably have to agree to disagree on this, but I will make one last attempt for my position in this thread.

The main point is that a treasury is not really debt. It is just a different form of currency. Deficit spending levels (paid for by printed dollars or issued treasuries) that exceed the real productive capacity of the economy are what contributes to inflation. It seems a subtle difference, but it is an important one. The Federal government does not need your tax dollars in order to fund itself. Rather, you need dollars to pay taxes the Federal government imposes on you. If it injects too many dollars into the system (in the form of bills or bonds) that exceed the capacity of the economy to actually make stuff....then inflation rises. There is no 'inflating away' the debt....because there isn't really a debt to be inflated away.

Taxes reduce the money supply (helping to control deficits, and therefore inflation) and create demand for dollars. They do not fund the government.

There is no need to 'inflate away' Japanese bonds. If the BOJ issued a deal to let all bond holders swap their bonds for Yen, the amount of wealth would stay the same. The Japanese government does not have to go somewhere to take Yen from.....it just adds it to a spreadsheet or runs the presses.

Eurozone countries, or those who peg their currency to another one, cannot perform this trick. They have to go out in the economy and take those Euros from their citizens to pay for things the same way the Roman Empire needed real gold from somewhere to pay for things long before the invention of fiat currency.

Again for the U.S. Federal government; deficits can cause inflation, but surpluses can also cause deflation. Treasuries are just interest bearing dollars the government creates to help regulate the real economy (interest rates, inflation, ect). If the treasury made a $10 trillion coin and deposited it at the Federal Reserve to balance out the Fed's ownership of treasuries.....nothing would happen. Other than apocalyptic headlines on CNBC of course. Inflation would not budge. It is a 1-for-1 swap.
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Re: Vanguard International Bonds

Post by Steve Reading »

Alchemist wrote: Mon Sep 14, 2020 9:05 pm If the treasury made a $10 trillion coin and deposited it at the Federal Reserve to balance out the Fed's ownership of treasuries.....nothing would happen. Other than apocalyptic headlines on CNBC of course. Inflation would not budge. It is a 1-for-1 swap.
I don't think the treasury or US government can make a $10 trillion coin since the treasury can't make money at all. It is the Fed that can do that. Everything in your post is true because the Fed and Treasury work in a coordinated fashion here in the US to effectively print money. But the treasury or US government cannot make dollars and so cannot perform the above hypothetical if I'm not mistaken.

Please correct me if I'm wrong.
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Re: Vanguard International Bonds

Post by Alchemist »

Edited to add: My comments below on how government funding / deficits work are completely incorrect and were based on a misunderstanding of macroeconomics. For further information on this incorrect view (MMT), please see the below academic paper correcting these views via the mainstream economic models:

https://docplayer.net/5083818-A-critiqu ... -mmt.html

I apologize for any misinformation about economic models I contributed to with my incorrect statements on this issue.


Steve Reading wrote: Mon Sep 14, 2020 9:33 pm
Alchemist wrote: Mon Sep 14, 2020 9:05 pm If the treasury made a $10 trillion coin and deposited it at the Federal Reserve to balance out the Fed's ownership of treasuries.....nothing would happen. Other than apocalyptic headlines on CNBC of course. Inflation would not budge. It is a 1-for-1 swap.
I don't think the treasury or US government can make a $10 trillion coin since the treasury can't make money at all. It is the Fed that can do that. Everything in your post is true because the Fed and Treasury work in a coordinated fashion here in the US to effectively print money. But the treasury or US government cannot make dollars and so cannot perform the above hypothetical if I'm not mistaken.

Please correct me if I'm wrong.
The answer is actually a little complicated. The U.S. Mint, a bureau of the Treasury Department, is who creates coins. The Federal Reserve controls paper/digital money. Actual physical notes are printed by the Bureau of Engraving and Printing (which is also under the Treasury) for the Federal Reserve.

Yes I had to look that up.

I just remember the coin part because the 'fail safe' plan during the ridiculous Debt Ceiling controversy was for the Mint to simply make a multi-trillion dollar coin and deposit it at the Fed if Congress had failed to fix the antiquated law that dates back to when the dollar was pegged to gold (pre-fiat currency era).
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Re: Vanguard International Bonds

Post by LTCM »

Alchemist wrote: Fri Sep 11, 2020 9:46 pm Also 'inflate away' the debt is looking at it the wrong way. A currency sovereign that issues a bond is really just issuing an interest bearing version of its currency. Treasuries are just dollars that provide some level of interest. They are not really "debt" in any meaningful sense of the word. And yes this implies issuing treasuries is akin to printing money regardless of QE or no-QE. Treasuries can play vital roles in the market that have nothing to do with being debt for the government.
This guy MMTs. :beer
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