Are international bonds worth it?

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tom8584
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Joined: Mon Jul 21, 2014 1:28 am

Are international bonds worth it?

Post by tom8584 »

Hi -

I'd like to hear your opinion about two investment strategies:
- Option #1: 30% US equity, 20% International equity, 35% US Munis, 15% International bonds
- Option #2: 30% US equity, 20% International equity, 50% US Munis

Assume that scope is a taxable account and that the investor is in the highest tax bracket.

Under what conditions would you pick Option 1 over Option 2?

Thanks for sharing your thoughts.
BJJ_GUY
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Joined: Wed Mar 13, 2019 7:45 am

Re: Are international bonds worth it?

Post by BJJ_GUY »

tom8584 wrote: Wed Apr 07, 2021 11:20 pm Hi -

I'd like to hear your opinion about two investment strategies:
- Option #1: 30% US equity, 20% International equity, 35% US Munis, 15% International bonds
- Option #2: 30% US equity, 20% International equity, 50% US Munis

Assume that scope is a taxable account and that the investor is in the highest tax bracket.

Under what conditions would you pick Option 1 over Option 2?

Thanks for sharing your thoughts.
International bonds don't make sense as a part of a long-term portfolio in general, let alone a taxable account.

So my answer would be the only time I'd consider option 1 is an opportunistic value investment after a dislocation that, for some reason, resulted in international bonds offering great relative value and high absolute yields. But it would be sold once most of that juice was squeezed
carolinaman
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Location: North Carolina

Re: Are international bonds worth it?

Post by carolinaman »

I do not like international bonds because in addition to interest rate risk, they have currency risk which is too much risk for a supposedly safe investment. Currency risk could be hedged, but there is an added cost for that.
Dandy
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Re: Are international bonds worth it?

Post by Dandy »

I view bonds and other fixed income as a means of mitigating portfolio risk, having some safer assets to fund expenses should equities take a big hit so I don't have to sell them, provide modest income and a source of money to rebalance my portfolio.

I think there are very many US based fixed income choices to accomplish my fixed income needs. So, I don't see any pressing need for international bonds/bond funds.
Valuethinker
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Re: Are international bonds worth it?

Post by Valuethinker »

carolinaman wrote: Thu Apr 08, 2021 7:33 am I do not like international bonds because in addition to interest rate risk, they have currency risk which is too much risk for a supposedly safe investment. Currency risk could be hedged, but there is an added cost for that.
The cost of currency hedging should be quite small. The majority of bond funds are currency hedged.

However when currency is hedged, the effect is to move the fund return to (approximately) equivalent to the fund return in the home currency. The cost of hedging is just the difference in interest rates between the 2 countries (but with the opposite sign).

So if the US was 2% interest rates, short term, and Japan was 1%, the cost of hedging Japanese bonds for a US investor would add +1% to returns (roughly). For a Japanese investor hedging US Treasury bonds back into Yen, the cost would be c. -1% to returns.

The only differences in return then arise from factors like credit risk and the different shapes of the yield curves.
secondopinion
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Re: Are international bonds worth it?

Post by secondopinion »

BJJ_GUY wrote: Thu Apr 08, 2021 12:06 am
tom8584 wrote: Wed Apr 07, 2021 11:20 pm Hi -

I'd like to hear your opinion about two investment strategies:
- Option #1: 30% US equity, 20% International equity, 35% US Munis, 15% International bonds
- Option #2: 30% US equity, 20% International equity, 50% US Munis

Assume that scope is a taxable account and that the investor is in the highest tax bracket.

Under what conditions would you pick Option 1 over Option 2?

Thanks for sharing your thoughts.
International bonds don't make sense as a part of a long-term portfolio in general, let alone a taxable account.

So my answer would be the only time I'd consider option 1 is an opportunistic value investment after a dislocation that, for some reason, resulted in international bonds offering great relative value and high absolute yields. But it would be sold once most of that juice was squeezed
Unless the tax brackets and yield are high, municipals are not worth it; such a person could buy high-quality corporate bonds and fare better.

Granted, internationals may get some premium at times and the US could do better at times; why guess and just hold both? Some countries have better bond ratings than the US after all.
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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grabiner
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Re: Are international bonds worth it?

Post by grabiner »

tom8584 wrote: Wed Apr 07, 2021 11:20 pm Hi -

I'd like to hear your opinion about two investment strategies:
- Option #1: 30% US equity, 20% International equity, 35% US Munis, 15% International bonds
- Option #2: 30% US equity, 20% International equity, 50% US Munis

Assume that scope is a taxable account and that the investor is in the highest tax bracket.

Under what conditions would you pick Option 1 over Option 2?
Never. International bonds might give a diversification benefit, but this isn't worth the tax cost at 40.8%. I normally estimate that muni yields are 25% lower than yields on taxable bonds of comparable risk, so the tax cost is an extra 16% of the international bond yield, which is just as much a cost as expenses. The only bonds that make sense in a taxable account in that bracket are munis, savings bonds, and possibly TIPS (which are exempt from state tax and have low yields as compensation for their low risk).

But if you also have a tax-deferred account, you could hold whatever bonds you want there for diversification, and add more stock to the taxable account. I don't think international bonds offer much diversification benefit compared to US bonds, so I normally recommend just using Total Bond Market in the tax-deferred account, but they wouldn't hurt either in a low-cost fund.
Wiki David Grabiner
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