What is the case for international bonds?

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LMK5
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What is the case for international bonds?

Post by LMK5 »

I see that Vanguard incorporates international bonds into their Target Date and LifeStrategy funds. Can someone enlighten me on the following:

1) Are international bonds necessary for diversification?
2) What are the behavioral differences between domestic and international bonds?
3) What is the correlation between international and domestic government bonds?
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Re: What is the case for international bonds?

Post by secondopinion »

LMK5 wrote: Thu Apr 01, 2021 2:16 pm I see that Vanguard incorporates international bonds into their Target Date and LifeStrategy funds. Can someone enlighten me on the following:

1) Are international bonds necessary for diversification?
2) What are the behavioral differences between domestic and international bonds?
3) What is the correlation between international and domestic government bonds?
  • Slightly. Not too much after they are USD-hedged.
  • Not that much; they have the same risks for the most part (interest rate and credit risk make up most of the risk; after USD-hedging, which many funds do, that is pretty much it). International bonds are usually slightly more correlated to the market but the correlation is still rather nominal.
  • I am not sure on government to government comparison; but general investment-grade bonds has a fairly strong correlation (0.75-0.85) with each other domestic and international (hedging for USD).
Essentially, it makes little difference because of the USD-hedge; but it is at least not harmful to have them.
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Re: What is the case for international bonds?

Post by AlwaysLearningMore »

LMK5 wrote: Thu Apr 01, 2021 2:16 pm I see that Vanguard incorporates international bonds into their Target Date and LifeStrategy funds. Can someone enlighten me on the following:

1) Are international bonds necessary for diversification?
2) What are the behavioral differences between domestic and international bonds?
3) What is the correlation between international and domestic government bonds?
"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"

https://tinyurl.com/y7htuclx
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Re: What is the case for international bonds?

Post by AlwaysLearningMore »

Dr. Bill. 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.

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.
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Re: What is the case for international bonds?

Post by nisiprius »

Vanguard has presented its reasons in a paper. The paper is pretty full of data and information, so you probably should look at it. Except that, oddly, I don't seem to be able to find it on Vanguard's website. Anyway, for some strange reason, their 2014 paper on the subject is available here:

Global fixed income: Considerations for U.S. investors.

I read it when it came out and I found it utterly unconvincing.

The "case" is a claimed tiny amount of diversification due to variations in national economies and interest rates.

If I were using one of Vanguard's all-in-one funds (Target Retirement and LifeStrategy) I would be perfectly OK with having their international bond fund and wouldn't lift a finger to avoid it. As it is, I don't have one of those funds, I don't have Vanguard's international bond fund, and I wouldn't lift a finger to get it.
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Re: What is the case for international bonds?

Post by LMK5 »

Thanks for the great responses.
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Re: What is the case for international bonds?

Post by staustin »

LMK5 wrote: Thu Apr 01, 2021 2:16 pm I see that Vanguard incorporates international bonds into their Target Date and LifeStrategy funds. Can someone enlighten me on the following:

1) Are international bonds necessary for diversification?
2) What are the behavioral differences between domestic and international bonds?
3) What is the correlation between international and domestic government bonds?
With regard to our household portfolio, the DW and I are simply not comfortable with the current fiscal state of affairs in our beloved Republic. As such, we've made a conscious decision to alter our portfolio accordingly and diversify more broadly. We've moved a good portion of our bond holdings to a local currency emerging markets debt fund, which we categorize as part of our international equity allocation. We've also shifted a good amount to asian equities (though this wasn't part of your question). For us at least, it's an intentional non-dollar diversification. Bonds denominated in a currency, whose supply is being rapidly expanded, paying effectively zero, are not something we wish to hold in any large quantities. Our equity allocation though is only 30% of our total portfolio. For those with much heaver equity allocations, it probably makes less sense.
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Re: What is the case for international bonds?

Post by watchnerd »

Genuine diversification comes from adding TIPS to a bond portfolio, not more nominals in the form of USD-hedged low-yield foreign bonds.

As for diversification away from the dollar, one can get that via foreign equities already.

If one is really really worried about the dollar and didn't want a lot of equities, one might look at unhedged foreign bonds, like BWX.
Last edited by watchnerd on Thu Apr 01, 2021 10:02 pm, edited 1 time in total.
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Re: What is the case for international bonds?

Post by secondopinion »

AlwaysLearningMore wrote: Thu Apr 01, 2021 4:02 pm
LMK5 wrote: Thu Apr 01, 2021 2:16 pm I see that Vanguard incorporates international bonds into their Target Date and LifeStrategy funds. Can someone enlighten me on the following:

1) Are international bonds necessary for diversification?
2) What are the behavioral differences between domestic and international bonds?
3) What is the correlation between international and domestic government bonds?
"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"

https://tinyurl.com/y7htuclx
Where are you getting the SEC yield numbers? BND is giving 1.39% and BNDX is 0.39% (see the links on the ETF list https://institutional.vanguard.com/web/ ... ReturnsNAV). Also, if you consider after the currency hedges, the returns have been similar; so the SEC yield is probably not accurate to use for BNDX either. The quote is seriously misinformed as to how these funds work, and 0.045% is hardly a bank breaker either. BNDX increases the number of issuers, so having BNDX (as it is USD-hedged) is mostly to gain credit risk diversification and not currency risk diversification.
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Re: What is the case for international bonds?

Post by watchnerd »

nisiprius wrote: Thu Apr 01, 2021 6:29 pm

I read it when it came out and I found it utterly unconvincing.

The "case" is a claimed tiny amount of diversification due to variations in national economies and interest rates.
Ditto.

Nor am I convinced by Sharpe's philosophical view that one should invest in the global market weight of bonds simply for the sake of owning the whole market.

Because he cheats ;), coupling his risk portfolio bond investments with an LMP TIPS portfolio (okay, I have that, too) and a tenure to otherwise defray base income risk.

In other words, he's not investing in global market weight in bonds primarily to fill a safety role.

But he seems to have sold Vanguard on the concept, according to things he's said on YouTube.
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Re: What is the case for international bonds?

Post by secondopinion »

AlwaysLearningMore wrote: Thu Apr 01, 2021 4:03 pm Dr. Bill. 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.

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.
If I want international bonds for diversifying against the dollar, unhedged is the best way to do that (better than holding the currency). I do not count on their liquidity; that is, of course, not wise. The euro and yen may have failed, but the dollar could have weakened instead of them. Anyone who claims that no rational investor will do some thing probably does not understand the topic well enough.

"Your bonds are your 'safe' assets" is a pretty poor reason to not address the topic thoroughly; why is Bernstein expecting bonds to act like cash when they do not? Should an expert know that most bonds will carry considerable risk of some kind? What Bernstein has in mind for bonds is very narrow; who is this Bernstein? I question the advise, especially as it is getting cheaper with fees and costs to support the only part of the dialog that I agree with.

USD-hedged and the diversification is trivial, granted; but 0.045% is not going to break the bank. I doubt either way is going to lose.
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Re: What is the case for international bonds?

Post by unbiased »

I am assuming we are also including emerging market bonds? I own a small position of EM bonds as an "equity substitute" for emerging market equity, but only due to a more historical risk-adjusted return profile. Of course, history may not repeat, but at least the yield is small compensation for the risk.

I also own another small position in an unhedged developed corporate bond ETF that I occasionally throw some money into when the dollar is high. This is merely a piece of a few non-dollar assets that I include for armageddon purposes.

Despite that, I think it's still an easier case to not own developed international at this time. But I'm a tinkerer and I like to see how certain assets perform in different market environments over time.
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Re: What is the case for international bonds?

Post by bhusa »

AlwaysLearningMore wrote: Thu Apr 01, 2021 4:02 pm
LMK5 wrote: Thu Apr 01, 2021 2:16 pm I see that Vanguard incorporates international bonds into their Target Date and LifeStrategy funds. Can someone enlighten me on the following:

1) Are international bonds necessary for diversification?
2) What are the behavioral differences between domestic and international bonds?
3) What is the correlation between international and domestic government bonds?
"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"

https://tinyurl.com/y7htuclx
The foreign stock fund yield about 2.5% dividend , and out of which about 7% are taxed by foreign governments ; my question is how much percent of the foreign bond fund yields are taxed by foreign governments ? This amount will be lost if the fund is in a IRA.
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Re: What is the case for international bonds?

Post by nedsaid »

The case for owning International Bonds is mild and the accompanying diversification benefits are also mild. However, it is hard for me to ignore the largest asset class in the world. So I am in the camp that "it can't hurt and it might help a little." So I own them but think this is an entirely optional asset class for investors. The case for International Bonds is not a hill that I am going to die fighting over.
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Re: What is the case for international bonds?

Post by AlwaysLearningMore »

secondopinion wrote: Thu Apr 01, 2021 9:48 pm
AlwaysLearningMore wrote: Thu Apr 01, 2021 4:02 pm
LMK5 wrote: Thu Apr 01, 2021 2:16 pm I see that Vanguard incorporates international bonds into their Target Date and LifeStrategy funds. Can someone enlighten me on the following:

1) Are international bonds necessary for diversification?
2) What are the behavioral differences between domestic and international bonds?
3) What is the correlation between international and domestic government bonds?
"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"

https://tinyurl.com/y7htuclx
Where are you getting the SEC yield numbers? BND is giving 1.39% and BNDX is 0.39% (see the links on the ETF list https://institutional.vanguard.com/web/ ... ReturnsNAV). Also, if you consider after the currency hedges, the returns have been similar; so the SEC yield is probably not accurate to use for BNDX either. The quote is seriously misinformed as to how these funds work, and 0.045% is hardly a bank breaker either. BNDX increases the number of issuers, so having BNDX (as it is USD-hedged) is mostly to gain credit risk diversification and not currency risk diversification.
Those were the numbers Mr. Ferri quoted in his post in April 2018.

I've never seen anyone refer to Mr. Ferri (a CFA charter holder) as "seriously misinformed as to how these funds work."
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Re: What is the case for international bonds?

Post by AlwaysLearningMore »

secondopinion wrote: Thu Apr 01, 2021 10:20 pm ... who is this Bernstein? I question the advise, especially as it is getting cheaper with fees and costs to support the only part of the dialog that I agree with.
This link provides some background on Dr. Bernstein: https://tinyurl.com/yf36264g


Also https://tinyurl.com/4hph77jb

Advise is a verb meaning “to give counsel to; offer an opinion or suggestion as worth following.”

Advice is a noun meaning “an opinion or recommendation offered as a guide to action, conduct, etc.”
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Re: What is the case for international bonds?

Post by secondopinion »

AlwaysLearningMore wrote: Fri Apr 02, 2021 11:08 am
secondopinion wrote: Thu Apr 01, 2021 10:20 pm ... who is this Bernstein? I question the advise, especially as it is getting cheaper with fees and costs to support the only part of the dialog that I agree with.
This link provides some background on Dr. Bernstein: https://tinyurl.com/yf36264g


Also https://tinyurl.com/4hph77jb

Advise is a verb meaning “to give counsel to; offer an opinion or suggestion as worth following.”

Advice is a noun meaning “an opinion or recommendation offered as a guide to action, conduct, etc.”
Typo here; I already know the difference.
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Re: What is the case for international bonds?

Post by secondopinion »

AlwaysLearningMore wrote: Fri Apr 02, 2021 11:02 am
secondopinion wrote: Thu Apr 01, 2021 9:48 pm
AlwaysLearningMore wrote: Thu Apr 01, 2021 4:02 pm
LMK5 wrote: Thu Apr 01, 2021 2:16 pm I see that Vanguard incorporates international bonds into their Target Date and LifeStrategy funds. Can someone enlighten me on the following:

1) Are international bonds necessary for diversification?
2) What are the behavioral differences between domestic and international bonds?
3) What is the correlation between international and domestic government bonds?
"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"

https://tinyurl.com/y7htuclx
Where are you getting the SEC yield numbers? BND is giving 1.39% and BNDX is 0.39% (see the links on the ETF list https://institutional.vanguard.com/web/ ... ReturnsNAV). Also, if you consider after the currency hedges, the returns have been similar; so the SEC yield is probably not accurate to use for BNDX either. The quote is seriously misinformed as to how these funds work, and 0.045% is hardly a bank breaker either. BNDX increases the number of issuers, so having BNDX (as it is USD-hedged) is mostly to gain credit risk diversification and not currency risk diversification.
Those were the numbers Mr. Ferri quoted in his post in April 2018.

I've never seen anyone refer to Mr. Ferri (a CFA charter holder) as "seriously misinformed as to how these funds work."
That explains the yields being higher, but that does not explain the returns being similar regardless of the SEC yield. Is the SEC yield in US or local currency? It is a big difference and explains the root issue. My apologies to Mr. Ferri, but the post is potentially misleading; the post makes international bonds seem like they return nothing when they actually have kept up with US bonds.
Last edited by secondopinion on Fri Apr 02, 2021 2:10 pm, edited 1 time in total.
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Re: What is the case for international bonds?

Post by Robot Monster »

AlwaysLearningMore wrote: Fri Apr 02, 2021 11:02 am
secondopinion wrote: Thu Apr 01, 2021 9:48 pm
AlwaysLearningMore wrote: Thu Apr 01, 2021 4:02 pm
LMK5 wrote: Thu Apr 01, 2021 2:16 pm I see that Vanguard incorporates international bonds into their Target Date and LifeStrategy funds. Can someone enlighten me on the following:

1) Are international bonds necessary for diversification?
2) What are the behavioral differences between domestic and international bonds?
3) What is the correlation between international and domestic government bonds?
"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"

https://tinyurl.com/y7htuclx
Where are you getting the SEC yield numbers? BND is giving 1.39% and BNDX is 0.39% (see the links on the ETF list https://institutional.vanguard.com/web/ ... ReturnsNAV). Also, if you consider after the currency hedges, the returns have been similar; so the SEC yield is probably not accurate to use for BNDX either. The quote is seriously misinformed as to how these funds work, and 0.045% is hardly a bank breaker either. BNDX increases the number of issuers, so having BNDX (as it is USD-hedged) is mostly to gain credit risk diversification and not currency risk diversification.
Those were the numbers Mr. Ferri quoted in his post in April 2018.

I've never seen anyone refer to Mr. Ferri (a CFA charter holder) as "seriously misinformed as to how these funds work."
Vineviz said, "Also interesting that Rick Ferri completely ignored the fact that Vanguard's SEC yields for those two funds are not directly comparable."
link
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Re: What is the case for international bonds?

Post by secondopinion »

AlwaysLearningMore wrote: Fri Apr 02, 2021 11:08 am
secondopinion wrote: Thu Apr 01, 2021 10:20 pm ... who is this Bernstein? I question the advise, especially as it is getting cheaper with fees and costs to support the only part of the dialog that I agree with.
This link provides some background on Dr. Bernstein: https://tinyurl.com/yf36264g
My apologies to Dr. Bernstein; it just seems that so many people claim bonds are for the safety of principal when they are not. There is a big difference between short-term treasuries, long-term treasuries, high-yield corporate bonds, and high-grade unhedged international bonds. Each one behaves differently with the largest risk being a different source (and only the first protects principal in US dollars). There are similarities but I think most people, including Dr. Bernstein, would agree that all but the first are not safe assets of principal yet are bonds.

I guess I am a little moody and I am sorry about it.
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Re: What is the case for international bonds?

Post by secondopinion »

Robot Monster wrote: Fri Apr 02, 2021 2:04 pm
AlwaysLearningMore wrote: Fri Apr 02, 2021 11:02 am
secondopinion wrote: Thu Apr 01, 2021 9:48 pm
AlwaysLearningMore wrote: Thu Apr 01, 2021 4:02 pm
LMK5 wrote: Thu Apr 01, 2021 2:16 pm I see that Vanguard incorporates international bonds into their Target Date and LifeStrategy funds. Can someone enlighten me on the following:

1) Are international bonds necessary for diversification?
2) What are the behavioral differences between domestic and international bonds?
3) What is the correlation between international and domestic government bonds?
"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"

https://tinyurl.com/y7htuclx
Where are you getting the SEC yield numbers? BND is giving 1.39% and BNDX is 0.39% (see the links on the ETF list https://institutional.vanguard.com/web/ ... ReturnsNAV). Also, if you consider after the currency hedges, the returns have been similar; so the SEC yield is probably not accurate to use for BNDX either. The quote is seriously misinformed as to how these funds work, and 0.045% is hardly a bank breaker either. BNDX increases the number of issuers, so having BNDX (as it is USD-hedged) is mostly to gain credit risk diversification and not currency risk diversification.
Those were the numbers Mr. Ferri quoted in his post in April 2018.

I've never seen anyone refer to Mr. Ferri (a CFA charter holder) as "seriously misinformed as to how these funds work."
Vineviz said, "Also interesting that Rick Ferri completely ignored the fact that Vanguard's SEC yields for those two funds are not directly comparable."
link
Precisely, even a CFA can make mistakes. Currency can play tricks on the yield.
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.
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Re: What is the case for international bonds?

Post by GaryA505 »

I find it mildly amusing that a lot of the same people that say we should own a global market weight of stocks to own the whole worldwide stock market also say we should not own a global market weight of bonds simply for the sake of owning the whole bond market.

But maybe that's just me.
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Re: What is the case for international bonds?

Post by watchnerd »

GaryA505 wrote: Fri Apr 02, 2021 2:31 pm I find it mildly amusing that a lot of the same people that say we should own a global market weight of stocks to own the whole worldwide stock market also say we should not own a global market weight of bonds simply for the sake of owning the whole bond market.

But maybe that's just me.
It's not really mystifying if you look at how much risk-adjusted returns change, or rather don't change, via diversification with USD-hedged bonds.

USD-hedged international bonds aren't offering the same diversification as non-hedged equities because one of the major diversification factors, currency, is being removed.

If we want to talk unhedged international bonds, the answer might be different.

Although I would still stay that, if one already holds market weight in foreign equities in a stock dominant port, currency exposure in the portfolio already exists and precious bond space is better spent adding TIPS as a diversifier rather than doubling down on more currency exposure due to diminishing efficient frontier impact of adding 'more of the same' currency exposure element.

This might be less true for equity-light ports, where holding unhedged international bonds may still add currency diversification in impactful amounts.
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Re: What is the case for international bonds?

Post by abuss368 »

nedsaid wrote: Fri Apr 02, 2021 9:24 am The case for owning International Bonds is mild and the accompanying diversification benefits are also mild. However, it is hard for me to ignore the largest asset class in the world. So I am in the camp that "it can't hurt and it might help a little." So I own them but think this is an entirely optional asset class for investors. The case for International Bonds is not a hill that I am going to die fighting over.
I agree. I owned them a while back when I had a much more complicated portfolio. I simplified and simply use Total Bond. Pays higher dividends and building that passive income stream for retirement someday.

I also found it so much easier to rebalance between stocks and bonds with one simple bond fund (thus avoiding rebalancing within bonds).

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Re: What is the case for international bonds?

Post by abuss368 »

AlwaysLearningMore wrote: Fri Apr 02, 2021 11:02 am
secondopinion wrote: Thu Apr 01, 2021 9:48 pm
AlwaysLearningMore wrote: Thu Apr 01, 2021 4:02 pm
LMK5 wrote: Thu Apr 01, 2021 2:16 pm I see that Vanguard incorporates international bonds into their Target Date and LifeStrategy funds. Can someone enlighten me on the following:

1) Are international bonds necessary for diversification?
2) What are the behavioral differences between domestic and international bonds?
3) What is the correlation between international and domestic government bonds?
"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"

https://tinyurl.com/y7htuclx
Where are you getting the SEC yield numbers? BND is giving 1.39% and BNDX is 0.39% (see the links on the ETF list https://institutional.vanguard.com/web/ ... ReturnsNAV). Also, if you consider after the currency hedges, the returns have been similar; so the SEC yield is probably not accurate to use for BNDX either. The quote is seriously misinformed as to how these funds work, and 0.045% is hardly a bank breaker either. BNDX increases the number of issuers, so having BNDX (as it is USD-hedged) is mostly to gain credit risk diversification and not currency risk diversification.
Those were the numbers Mr. Ferri quoted in his post in April 2018.

I've never seen anyone refer to Mr. Ferri (a CFA charter holder) as "seriously misinformed as to how these funds work."
That is just it!!!!!! I have not read from one major investment advisor or expert that recommends we include international bonds in a well diversified portfolio. Only Vanguard!!!!!

Tony
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Re: What is the case for international bonds?

Post by watchnerd »

abuss368 wrote: Tue Apr 06, 2021 6:35 pm


That is just it!!!!!! I have not read from one major investment advisor or expert that recommends we include international bonds in a well diversified portfolio. Only Vanguard!!!!!

Tony
Blackrock has hedged DM sovereign offerings in the form of IGOV, so I imagine they work the pitch in form time to time, too. Although these days they seem to be promoting Chinese government bonds more.
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Re: What is the case for international bonds?

Post by abuss368 »

watchnerd wrote: Tue Apr 06, 2021 6:40 pm
abuss368 wrote: Tue Apr 06, 2021 6:35 pm


That is just it!!!!!! I have not read from one major investment advisor or expert that recommends we include international bonds in a well diversified portfolio. Only Vanguard!!!!!

Tony
Blackrock has hedged DM sovereign offerings in the form of IGOV, so I imagine they work the pitch in form time to time, too. Although these days they seem to be promoting Chinese government bonds more.
Really? I could not imagine an allocation to Chinese government bonds. I would be up at night.

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Re: What is the case for international bonds?

Post by watchnerd »

abuss368 wrote: Tue Apr 06, 2021 7:06 pm
watchnerd wrote: Tue Apr 06, 2021 6:40 pm
abuss368 wrote: Tue Apr 06, 2021 6:35 pm


That is just it!!!!!! I have not read from one major investment advisor or expert that recommends we include international bonds in a well diversified portfolio. Only Vanguard!!!!!

Tony
Blackrock has hedged DM sovereign offerings in the form of IGOV, so I imagine they work the pitch in form time to time, too. Although these days they seem to be promoting Chinese government bonds more.
Really? I could not imagine an allocation to Chinese government bonds. I would be up at night.

Tony
You can get them from Vanguard, too -- VWOB is 4% China gov.

Interestingly, I haven't seem the China-only bond funds show up on Blackrock US sites.

LEMB is 15% China.

BWX, which is not an EM bond fund, has a decent chunk of China, too.
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Re: What is the case for international bonds?

Post by JackoC »

AlwaysLearningMore wrote: Fri Apr 02, 2021 11:02 am
secondopinion wrote: Thu Apr 01, 2021 9:48 pm
AlwaysLearningMore wrote: Thu Apr 01, 2021 4:02 pm
LMK5 wrote: Thu Apr 01, 2021 2:16 pm I see that Vanguard incorporates international bonds into their Target Date and LifeStrategy funds. Can someone enlighten me on the following:
1) Are international bonds necessary for diversification?
2) What are the behavioral differences between domestic and international bonds?
3) What is the correlation between international and domestic government bonds?
"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"
https://tinyurl.com/y7htuclx
Where are you getting the SEC yield numbers? BND is giving 1.39% and BNDX is 0.39% (see the links on the ETF list https://institutional.vanguard.com/web/ ... ReturnsNAV). Also, if you consider after the currency hedges, the returns have been similar; so the SEC yield is probably not accurate to use for BNDX either. The quote is seriously misinformed as to how these funds work, and 0.045% is hardly a bank breaker either. BNDX increases the number of issuers, so having BNDX (as it is USD-hedged) is mostly to gain credit risk diversification and not currency risk diversification.
Those were the numbers Mr. Ferri quoted in his post in April 2018.

I've never seen anyone refer to Mr. Ferri (a CFA charter holder) as "seriously misinformed as to how these funds work."
It's not about any particular poster, though as a general rule I would not count on personal finance writers, whose expertise is making things simple for inexperienced investors, to get all the technical details right. Anyway, secondopinion is correct you have to take into account carry on the FX hedges to get an accurate idea of total return of a hedged foreign currency bond fund v USD denominated one, you really can't just use the SEC yields. And the Ferri quote does seem to ignore that, and/or assume the FX hedging is always a drag on return ('a hidden layer of cost', but the actual transactions cost would be quite small and a lower foreign yield tends to imply positive carry on sell foreign currency/buy USD forward FX hedge trades). However, the problem is you can't see the modification to return from the FX trades by looking at anything as simple as an SEC yield (itself imperfect for USD bond funds, but a useful quick indicator). You basically have to wait and see what the return is and try to tease out the effect of FX hedge carry. Vanguard, obviously, knows the pricing on each short term forward FX trade, but it's not the kind of think easy to look up on free-to-retail websites. And the short term interest rates prevailing in FX market can obviously change relative to longer term govt rates on either side of the currency pair, nor unfortunately do they necessarily even closely track short term government yields (T-bill etc.) or even short term LIBOR/interest rate swap rates in the two currencies.

But I also agree with secondopinion the reason you'd put money in hedged foreign currency DM bond funds is to diversify *credit*. If you think that pretty much sole reliance on US federal government (or gteed/quasi gteed like agencies) is OK for your 'safe' assets then stop there I'd say. The fact that the return on foreign govt bond plus FX hedge squiggles around a little differently than US govt bond is not enough reason to buy them, and the FX hedged foreign return *could* be significantly lower (you just can't tell that by looking at only the bond fund yields). Also you might gain some limited measure of diversification against the Ultimate Black Swan, a US federal debt crisis, other ways. For example gold, if you can stand for its wide random movements around a zero-ish real expected return in all the more likely cases. But it would very likely do well in the UBS. Nor could you expect other DM bond market conditions to necessarily be in good shape in the UBS, though IMO it's parochial to think the whole world would necessarily collapse if the US someday pushes the market's tolerance for its fiscal profligacy too far.

But again if you view the previous paragraph as 'that's impossible' I don't see much appeal in hedged DM bond funds. Nor unhedged DM ones to the extent that's a thing (IMO a responsibly diversified stock portfolio will already have some currency risk from significant allocation to DM stocks, even though currency risk of foreign stocks and bond is not nearly the same $ for $). Unhedged *EM* govt bond funds might be a worthwhile diversification of *risk asset* allocation. You'd be looking not only at yield but taking a view on eventual purchasing power convergence trend of EM to DM currencies, a risk view, but not exactly the *same* risk view as you take investing in EM stocks which like DM stocks do not track the value of their currencies of denomination nearly as closely as FX denominated bonds do. But if 'bond' means 'safe asset' then EM local bonds aren't part of the same discussion as BNDX.
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