Fidelity International Bond Index: China is top country?

[grok87]

Trying to figure out the country exposure of this fund- FBIIX.
https://fundresearch.fidelity.com/mutua ... /31635T732
Fidelity lists the top 5 issuers = 34.87% of portfolio as:

CHINA PEOPLES REPUBLIC OF
JAPAN GOVERNMENT OF
FRANCE REPUBLIC OF
ITALY REPUBLIC OF
CHINA DEVELOPMENT BANK

But then under country diversification it lists:

Portfolio Weight
France 9.78%
Germany 8.19%
Italy 6.07%
Spain 4.23%
United States 4.00%
Netherlands 2.38%
Belgium 1.60%
Austria 1.16%
Other Country -38.46%
Cash & Net Other Assets 101.05%

Anyone know what is going on here?

cheers,
grok

[dcabler]

Trying to figure out the country exposure of this fund- FBIIX.
https://fundresearch.fidelity.com/mutua ... /31635T732
Fidelity lists the top 5 issuers = 34.87% of portfolio as:

CHINA PEOPLES REPUBLIC OF
JAPAN GOVERNMENT OF
FRANCE REPUBLIC OF
ITALY REPUBLIC OF
CHINA DEVELOPMENT BANK

But then under country diversification it lists:

Portfolio Weight
France 9.78%
Germany 8.19%
Italy 6.07%
Spain 4.23%
United States 4.00%
Netherlands 2.38%
Belgium 1.60%
Austria 1.16%
Other Country -38.46%
Cash & Net Other Assets 101.05%

Anyone know what is going on here?

cheers,
grok

Could it be that the top 5 issuers are the actual entities that provide the bonds themselves? Then country diversification includes ALL providers of bonds in a given country when ranking them.

Fidelity's institutional site typically has additional information. They do include a monthly holdings report you can download and extract into a spreadsheet to see if what I wrote above might be true.
https://institutional.fidelity.com/app/ ... fbiix.html

Cheers.

[TipsQuestions]

I assume that page is showing erroneous data. The actual fund docs show around 20% of the fund is China.

[grok87]

Trying to figure out the country exposure of this fund- FBIIX.
https://fundresearch.fidelity.com/mutua ... /31635T732
Fidelity lists the top 5 issuers = 34.87% of portfolio as:

CHINA PEOPLES REPUBLIC OF
JAPAN GOVERNMENT OF
FRANCE REPUBLIC OF
ITALY REPUBLIC OF
CHINA DEVELOPMENT BANK

But then under country diversification it lists:

Portfolio Weight
France 9.78%
Germany 8.19%
Italy 6.07%
Spain 4.23%
United States 4.00%
Netherlands 2.38%
Belgium 1.60%
Austria 1.16%
Other Country -38.46%
Cash & Net Other Assets 101.05%

Anyone know what is going on here?

cheers,
grok

Could it be that the top 5 issuers are the actual entities that provide the bonds themselves? Then country diversification includes ALL providers of bonds in a given country when ranking them.

Fidelity's institutional site typically has additional information. They do include a monthly holdings report you can download and extract into a spreadsheet to see if what I wrote above might be true.
https://institutional.fidelity.com/app/ ... fbiix.html

Cheers.

thanks. here is the monthly holdings report
https://institutional.fidelity.com/app/ ... fbiix.html

i think you are right about the first list being issuers and the second list being countries. but it is still weird.
from the first list the top 5 make up 34.87% of the portfolio. which would mean on average 6.97% each. So china would be 14% for these two issuers.

Looking at the bottom of the monthly holding report, i suppose the negative amoounts are the currency hedges. so guess that may be why china doesn't appear on the country list. it may be effectively zero after the currency hedge positions (bought from chinese banks?) are netted out.

I guess i think the country list is very misleading in this case.

[grok87]

I assume that page is showing erroneous data. The actual fund docs show around 20% of the fund is China.

I think the actual exposure to china may be much lower.
i haven't figured out the fidelity fund. but i assume it is broadly similar to vanguard BNDX fund. from vanguard's website BNDX is about 1% china and the total emerging markets exposure is 7.1%
(download investment profile here)
https://advisors.vanguard.com/investmen ... #portfolio

so my best guess is that FBIIX is also about 1% china- don't have a source for that though.
cheers,
grok

[TipsQuestions]

I assume that page is showing erroneous data. The actual fund docs show around 20% of the fund is China.

I think the actual exposure to china may be much lower.
i haven't figured out the fidelity fund. but i assume it is broadly similar to vanguard BNDX fund. from vanguard's website BNDX is about 1% china and the total emerging markets exposure is 7.1%
(download investment profile here)
https://advisors.vanguard.com/investmen ... #portfolio

so my best guess is that FBIIX is also about 1% china- don't have a source for that though.
cheers,
grok

Sure looks like they have large China holdings. Click Prospectus->Tailored Shareholder... here: https://fundresearch.fidelity.com/mutua ... /31635T732

And Morningstar shows its top holdings to be Chinese bonds. Very different from the Vanguard fund.

[grok87]

I think the actual exposure to china may be much lower.
i haven't figured out the fidelity fund. but i assume it is broadly similar to vanguard BNDX fund. from vanguard's website BNDX is about 1% china and the total emerging markets exposure is 7.1%
(download investment profile here)
https://advisors.vanguard.com/investmen ... #portfolio

so my best guess is that FBIIX is also about 1% china- don't have a source for that though.
cheers,
grok

Sure looks like they have large China holdings. Click Prospectus->Tailored Shareholder... here: https://fundresearch.fidelity.com/mutua ... /31635T732

And Morningstar shows its top holdings to be Chinese bonds. Very different from the Vanguard fund.

thanks. yes you are correct. just looked at the shareholder report- it does show 20% in china.
https://www.actionsxchangerepository.fi ... 77%23-4%23

[nedsaid]

Which begs the question, how safe are mainland Chinese bonds? Enquiring minds want to know.

[grok87]

Which begs the question, how safe are mainland Chinese bonds? Enquiring minds want to know.

i don't know. but it is worth pointing out that both of these funds- the fidelity and the vanguard- are investment grade and currency hedged. i personally am not comfortable with 20% bond exposure to china. i'm not sure i'd be comfortable with 20% from any country bond issuer.

[Valuethinker]

Which begs the question, how safe are mainland Chinese bonds? Enquiring minds want to know.

Probably about as safe as you can get.

Arguably safer than the USA, because Chairman Xi is never going to get into an argument with the Congress of the CPC about budgets.

The Chinese are not going to default on external government debt on their own accord. That would be disastrous for their operation in the world economy, so it won't happen.

The issue is more if there was a war or near-war situation between USA and China, whether the interest payments on the bonds would be honoured. Whether US sanctions might effectively lead to a "freeze" on external government debt.

[nedsaid]

Which begs the question, how safe are mainland Chinese bonds? Enquiring minds want to know.

i don't know. but it is worth pointing out that both of these funds- the fidelity and the vanguard- are investment grade and currency hedged. i personally am not comfortable with 20% bond exposure to china. i'm not sure i'd be comfortable with 20% from any country bond issuer.

Thank you for an honest answer. This is causing me to rethink International Bond Funds a bit.

[Valuethinker]

Trying to figure out the country exposure of this fund- FBIIX.
https://fundresearch.fidelity.com/mutua ... /31635T732
Fidelity lists the top 5 issuers = 34.87% of portfolio as:

CHINA PEOPLES REPUBLIC OF
JAPAN GOVERNMENT OF
FRANCE REPUBLIC OF
ITALY REPUBLIC OF
CHINA DEVELOPMENT BANK

But then under country diversification it lists:

Portfolio Weight
France 9.78%
Germany 8.19%
Italy 6.07%
Spain 4.23%
United States 4.00%
Netherlands 2.38%
Belgium 1.60%
Austria 1.16%
Other Country -38.46%
Cash & Net Other Assets 101.05%

Anyone know what is going on here?

cheers,
grok

An explanation which is not applicable here is that Eurobonds - the predominant form of finance raising by bonds outside the USA - could be grouped by market of listing rather than nationality of underlying credit name.

(Remembering a Eurobond is not a bond issued in Euros, but a bond issued internationally by a borrower (of any currency, dollar Eurobonds are the biggest single market).

[nedsaid]

Which begs the question, how safe are mainland Chinese bonds? Enquiring minds want to know.

Probably about as safe as you can get.

Arguably safer than the USA, because Chairman Xi is never going to get into an argument with the Congress of the CPC about budgets.

The Chinese are not going to default on external government debt on their own accord. That would be disastrous for their operation in the world economy, so it won't happen.

The issue is more if there was a war or near-war situation between USA and China, whether the interest payments on the bonds would be honoured. Whether US sanctions might effectively lead to a "freeze" on external government debt.

My concern is that many Americans very naively believe that other peoples around the world think like we do in the west, that others have the same values. Not everyone is concerned about such things as private property, rule of law and enforcement of contracts; thus outright confiscation of assets owned by foreigners is not unthinkable. People can act against what we perceive as their self-interest, particularly if there is a higher aim. Again, if you own a mainland Chinese stock, do you really own anything at all? Could this concern regarding mainland Chinese stock apply to their bonds as well? There might be a situation where the leaders don't care about what we perceive as disastrous. There is an old saying about not letting a good crisis go to waste. A good disaster can be very advantageous to certain people.

[grok87]

Which begs the question, how safe are mainland Chinese bonds? Enquiring minds want to know.

Probably about as safe as you can get.

Arguably safer than the USA, because Chairman Xi is never going to get into an argument with the Congress of the CPC about budgets.

The Chinese are not going to default on external government debt on their own accord. That would be disastrous for their operation in the world economy, so it won't happen.

The issue is more if there was a war or near-war situation between USA and China, whether the interest payments on the bonds would be honoured. Whether US sanctions might effectively lead to a "freeze" on external government debt.

thanks Valuethinker. always good to get your take on things.

i'm sure you know this, but worth saying for others reading that in addition to defaul risk, chinese yield curve risk is one of the risks here.

said another way, FBIIX is currency hedged back to USD. so the US investor is left with 2 main risks:

1) default risk
2) foreign yield curve risk.

ie if foreign interest rates rise then a US investor would suffer losses.

cheers
grok

[nedsaid]

What I did above was an exercise in thinking the unthinkable. If you are in a well-diversified International Bond fund, chances are very good that things will be just fine. Persistent pessimism is not good for investors as this changes perception and it makes it more difficult to see the opportunities that are out there. But it is a good thing to think about from time to time what could go wrong and make an evaluation of prudent steps to address those risks. Or as Larry Swedroe used to say, what is improbable is not impossible. The best we can do to is to diversify as well as we can and a global portfolio of US Stock, International Stock, US Bond, and International Bond indexes is a good solution.

In my case, my exposure to International Bonds is probably 3% of my retirement accounts, so this isn't something that I lie awake over. My retirement portfolio is still 80% in US Stocks and Bonds and about 20% in International Stocks and Bonds.

[watchnerd]

Which begs the question, how safe are mainland Chinese bonds? Enquiring minds want to know.

Which begs the question, how safe are mainland Chinese bonds? Enquiring minds want to know.

i don't know. but it is worth pointing out that both of these funds- the fidelity and the vanguard- are investment grade and currency hedged. i personally am not comfortable with 20% bond exposure to china. i'm not sure i'd be comfortable with 20% from any country bond issuer.

Which is one of the reasons I prefer VGCAX for my international USD hedged bond holding:

https://investor.vanguard.com/investmen ... omposition

China exposure is 0.10%.

It also has very little sovereign debt (including US), only 18%, it's mostly investment grade corporates.

[nedsaid]

Which begs the question, how safe are mainland Chinese bonds? Enquiring minds want to know.

i don't know. but it is worth pointing out that both of these funds- the fidelity and the vanguard- are investment grade and currency hedged. i personally am not comfortable with 20% bond exposure to china. i'm not sure i'd be comfortable with 20% from any country bond issuer.

Which is one of the reasons I prefer VGCAX for my international USD hedged bond holding:

https://investor.vanguard.com/investmen ... omposition

China exposure is 0.10%.

It also has very little sovereign debt (including US), only 18%, it's mostly investment grade corporates.

I ask the question and a good solution appears. Thank you, watchnerd.

[watchnerd]

Which begs the question, how safe are mainland Chinese bonds? Enquiring minds want to know.

Probably about as safe as you can get.

Arguably safer than the USA, because Chairman Xi is never going to get into an argument with the Congress of the CPC about budgets.

The Chinese are not going to default on external government debt on their own accord. That would be disastrous for their operation in the world economy, so it won't happen.

The issue is more if there was a war or near-war situation between USA and China, whether the interest payments on the bonds would be honoured. Whether US sanctions might effectively lead to a "freeze" on external government debt.

Yes. The US cutting off Chinese financial institutions from accessing the Western financial system (as was done to Russia) and thus preventing the coupons from being paid and making the bonds unsellable would be the something I'd see more likely than default.

[TipsQuestions]

Which begs the question, how safe are mainland Chinese bonds? Enquiring minds want to know.

Probably about as safe as you can get.

Arguably safer than the USA, because Chairman Xi is never going to get into an argument with the Congress of the CPC about budgets.

The Chinese are not going to default on external government debt on their own accord. That would be disastrous for their operation in the world economy, so it won't happen.

The issue is more if there was a war or near-war situation between USA and China, whether the interest payments on the bonds would be honoured. Whether US sanctions might effectively lead to a "freeze" on external government debt.

Eh. There is a single guy -one guy- who wields near absolute power in China. He's repaying the debt he issues to foreign investors entirely at his pleasure. If he decides to stop mailing us the checks, there's absolutely nothing we can do about it. We can't vote him out in the next election. He doesn't answer to us, or anyone.

[watchnerd]

Here is another possibility -- Chinese debt gets re-rated when the amount of local debt gets taken over by the central government, which would presumably mean a big hit to mark to market for existing Chinese debt.

https://www.youtube.com/watch?v=XnipTQa ... eopolitics

[Valuethinker]

Probably about as safe as you can get.

Arguably safer than the USA, because Chairman Xi is never going to get into an argument with the Congress of the CPC about budgets.

The Chinese are not going to default on external government debt on their own accord. That would be disastrous for their operation in the world economy, so it won't happen.

The issue is more if there was a war or near-war situation between USA and China, whether the interest payments on the bonds would be honoured. Whether US sanctions might effectively lead to a "freeze" on external government debt.

Eh. There is a single guy -one guy- who wields near absolute power in China. He's repaying the debt he issues to foreign investors entirely at his pleasure. If he decides to stop mailing us the checks, there's absolutely nothing we can do about it. We can't vote him out in the next election. He doesn't answer to us, or anyone.

Let's put it this way. Of an Emerging Market, China probably has the lowest default probability of any country. The last time they defaulted, they were running 1 million per cent inflation (no I don't think I am exaggerating) and the government in power (the Nationalists) was about to be decisively defeated in a civil war that had cost millions of lives by the Communist Party of China -- who have ruled it since 1949.

China's credit rating is as follows1:
Standard & Poor's: A+ with stable outlook
Moody's: A1 with stable outlook
Fitch: A+ with stable outlook
DBRS: A (high) with negative outlook
Fitch affirmed China's credit rating at 'A+' with a stable outlook2.

That's from Google AI (ie top of the search). For a sovereign, that's pretty good. Remembering that the USA is now only AA (with S&P) from memory.

China is not Russia (which in 1998 did default, but not on all its debts) which was a single commodity state (oil, or oil & gas). It's a highly diversified export machine.

I could, sitting in the Chinese seat, make a fairly bearish case on US government debt (I wouldn't be alone in that, either - plenty of smarter people than I have done so). We'd have to get into politics, personalities, institutions - so I won't

If there's a tear in the world order - of the kind a military confrontation over Taiwan might provoke, say - then all bets are off.

But generally, part and parcel of China's export and economic success is an ability to borrow on foreign markets - even though arguably it doesn't need to. Because it runs a very big current account surplus. So they won't do anything to imperil that situation - short of going to war/ nearly going to war with someone. Because that export success is intrinsic to the economic and political goals for the country.

China has a huge domestic debt problem. And, indeed, Chinese private entities that borrowed outside of China from foreigners are likely to default - Evergrande is the largest corporate bankruptcy in world history. (I am not sure where we have gotten to on their external debts). The workout of the internal debt situation will be painful and lengthy - where in the early 2000s they got away with it because they had 8%+ GDP growth pa, they don't have that now.

But China's government? No.

[Valuethinker]

Probably about as safe as you can get.

Arguably safer than the USA, because Chairman Xi is never going to get into an argument with the Congress of the CPC about budgets.

The Chinese are not going to default on external government debt on their own accord. That would be disastrous for their operation in the world economy, so it won't happen.

The issue is more if there was a war or near-war situation between USA and China, whether the interest payments on the bonds would be honoured. Whether US sanctions might effectively lead to a "freeze" on external government debt.

Yes. The US cutting off Chinese financial institutions from accessing the Western financial system (as was done to Russia) and thus preventing the coupons from being paid and making the bonds unsellable would be the something I'd see more likely than default.

This is it.

It's reasonable to worry if we have reached 1913 in the global order. About to go over the Niagara Falls we cannot see ahead (although we can hear the sounds of same).

That's definitely a more likely scenario than some Chinese default

https://www.ceicdata.com/en/indicator/c ... Dec%202023.

Chinese external debt is 13.7% of GDP in 2023 according to the above. High of 17.0% in Dec 2014 (towards the latter part of the largest fiscal stimulus (at least in peacetime) in world history, coming out of the 2008 crisis).

https://www.ceicdata.com/en/indicator/u ... Dec%202023.

US external debt is 97% of GDP. That's fallen since 2020 by quite a bit, but it's still among the highest recorded in peacetime (since the 1960s).

Now there are all kinds of reasons why we think a non-political default of the USA is unlikely. Although a public figure certainly mused about it at one point and that would be consistent.

But I think therefore we should also see that there's no benefit to a Chinese government debt default for the Chinese economy nor for the CPC which governs China.

[TipsQuestions]

Eh. There is a single guy -one guy- who wields near absolute power in China. He's repaying the debt he issues to foreign investors entirely at his pleasure. If he decides to stop mailing us the checks, there's absolutely nothing we can do about it. We can't vote him out in the next election. He doesn't answer to us, or anyone.

Let's put it this way. Of an Emerging Market, China probably has the lowest default probability of any country. The last time they defaulted, they were running 1 million per cent inflation (no I don't think I am exaggerating) and the government in power (the Nationalists) was about to be decisively defeated in a civil war that had cost millions of lives by the Communist Party of China -- who have ruled it since 1949.

I do agree the odds of Xi not paying us back are low. But there is risk there, and I question whether, at the 2% yields these bonds offer, foreign investors in frenemy countries are really getting compensated for it. I certainly won't be investing in them.

[Valuethinker]

Let's put it this way. Of an Emerging Market, China probably has the lowest default probability of any country. The last time they defaulted, they were running 1 million per cent inflation (no I don't think I am exaggerating) and the government in power (the Nationalists) was about to be decisively defeated in a civil war that had cost millions of lives by the Communist Party of China -- who have ruled it since 1949.

I do agree the odds of Xi not paying us back are low. But there is risk there, and I question whether, at the 2% yields these bonds offer, foreign investors in frenemy countries are really getting compensated for it. I certainly won't be investing in them.

The problem is very much one of event risk -- I agree. China and the US face off over Taiwan. Or some other crisis we cannot see.

That I think is a general problem with Emerging Market debt. You have these binary situations of event risk. It's OK (and you got your 5% pa premium) until the country defaults. And the macroeconomic crises that cause these sorts of things can be highly synchronised.

It's hard for me to imagine that any interest rate on Argentinian debt compensates investors for the risk of default. Given Argentina's record as a serial defaulter.

I doubt the market for EM debt is inefficient, per se, but the risk premium moves in and out. Easy to get caught on the wrong side of that.

[Trance]

China is a huge player in the bond market. They are second after America and even surpassed Japan. iShares has a BNDW equivalent (global bond etf) called AGGG for international investors and it contains:

• 40% America

• 10% China

• 10% Japa

• 5% France

etc.

Now Vanguard does forgo Chinese bonds and doesn't include them if you want to avoid that. In both BNDX (international only) and BNDW (global bond market). I'm not that big of a fan of international bonds because of the hedging and the lack of non investment grade bonds in the index.

[tdgb]

Trying to figure out the country exposure of this fund- FBIIX.
https://fundresearch.fidelity.com/mutua ... /31635T732
Fidelity lists the top 5 issuers = 34.87% of portfolio as:

CHINA PEOPLES REPUBLIC OF
JAPAN GOVERNMENT OF
FRANCE REPUBLIC OF
ITALY REPUBLIC OF
CHINA DEVELOPMENT BANK

But then under country diversification it lists:

Portfolio Weight
France 9.78%
Germany 8.19%
Italy 6.07%
Spain 4.23%
United States 4.00%
Netherlands 2.38%
Belgium 1.60%
Austria 1.16%
Other Country -38.46%
Cash & Net Other Assets 101.05%

Anyone know what is going on here?

cheers,
grok

Could it be that the top 5 issuers are the actual entities that provide the bonds themselves? Then country diversification includes ALL providers of bonds in a given country when ranking them.

Fidelity's institutional site typically has additional information. They do include a monthly holdings report you can download and extract into a spreadsheet to see if what I wrote above might be true.
https://institutional.fidelity.com/app/ ... fbiix.html

Cheers.

Probably this if I had to take a guess. The first list are issuing entities while the second one is the actual exposure. I don't know how exposure is determined in this case in particular, but they don't necessarily match. For example, China Development Bank is known for financing lots of projects abroad which would probably dilute away the exposure to China even though it's a Chinese bank.
To be clear I don't know if this is actually the case, just a potential answer.

[Valuethinker]

China is a huge player in the bond market. They are second after America and even surpassed Japan. iShares has a BNDW equivalent (global bond etf) called AGGG for international investors and it contains:

• 40% America

• 10% China

• 10% Japa

• 5% France

etc.

Now Vanguard does forgo Chinese bonds and doesn't include them if you want to avoid that. In both BNDX (international only) and BNDW (global bond market). I'm not that big of a fan of international bonds because of the hedging and the lack of non investment grade bonds in the index.

the lack of non investment grade bonds in the index

Do you mean:

- there are only Investment Grade bonds in the index? (So that's c 20 countries including all the others in the G8 - Japan, Canada, Australia, UK, Germany, France, Italy etc) and you would prefer it if the index included non IG countries?

[Trance]

China is a huge player in the bond market. They are second after America and even surpassed Japan. iShares has a BNDW equivalent (global bond etf) called AGGG for international investors and it contains:

• 40% America

• 10% China

• 10% Japa

• 5% France

etc.

Now Vanguard does forgo Chinese bonds and doesn't include them if you want to avoid that. In both BNDX (international only) and BNDW (global bond market). I'm not that big of a fan of international bonds because of the hedging and the lack of non investment grade bonds in the index.

the lack of non investment grade bonds in the index

Do you mean:

- there are only Investment Grade bonds in the index? (So that's c 20 countries including all the others in the G8 - Japan, Canada, Australia, UK, Germany, France, Italy etc) and you would prefer it if the index included non IG countries?

Yes! Also a lot of countries have bonds from corporations that fall below investment grade, like fallen angels, that get ignored and instead I'd prefer to include them at market weight. Same with ignoring emerging markets. A lot of them are investment grade but still ignored. And there is even controversy over some like India over their credit rating which I won't discuss for off topic reasons.A type of universal index, which exists in America (iShares has it with IUSB) has yet to be created internationally.

[grok87]

Do you mean:

- there are only Investment Grade bonds in the index? (So that's c 20 countries including all the others in the G8 - Japan, Canada, Australia, UK, Germany, France, Italy etc) and you would prefer it if the index included non IG countries?

Yes! Also a lot of countries have bonds from corporations that fall below investment grade, like fallen angels, that get ignored and instead I'd prefer to include them at market weight. Same with ignoring emerging markets. A lot of them are investment grade but still ignored. And there is even controversy over some like India over their credit rating which I won't discuss for off topic reasons.A type of universal index, which exists in America (iShares has it with IUSB) has yet to be created internationally.

"market weight"- so i'm not expecting to convince you, but am posting anyway for others who might be reading.

As bogleheads many of us (me too) are big fans of market weighting for stocks. But i think it is different for bonds.

Does it really make sense to buy the most bonds from the bond issuer that has the most debt? IMHO it doesn't. So what is the alternative?

1) David Swensen- in Unconventional Success argues you should just stick to US Treasuries and TIPs.

2) Vanguard advocates (see target funds):
a) Overweighting US Bonds vs. International. 70/30 vs market weight 52/48
b) Sticking to Developed Markets investment grade bonds
c) For international bonds currency hedging back to USD.

Here is what i think some of the reasoning behind this is- starting with c)

c) Currency hedging: I think the idea is that as a US investor one should not expect to be compensated for bearing currency risk. So it is best to get rid of the risk by hedging it away.

b) Excluding emerging market bonds and below investment grade bonds: I think this falls under "take your risk on the equity side".
a) I think they did a study where they found this mix was optimal from a risk/reward perspective.

cheers,
grok

[Trance]

Yes! Also a lot of countries have bonds from corporations that fall below investment grade, like fallen angels, that get ignored and instead I'd prefer to include them at market weight. Same with ignoring emerging markets. A lot of them are investment grade but still ignored. And there is even controversy over some like India over their credit rating which I won't discuss for off topic reasons.A type of universal index, which exists in America (iShares has it with IUSB) has yet to be created internationally.

"market weight"- so i'm not expecting to convince you, but am posting anyway for others who might be reading.

As bogleheads many of us (me too) are big fans of market weighting for stocks. But i think it is different for bonds.

Does it really make sense to buy the most bonds from the bond issuer that has the most debt? IMHO it doesn't. So what is the alternative?

1) David Swensen- in Unconventional Success argues you should just stick to US Treasuries and TIPs.

2) Vanguard advocates (see target funds):
a) Overweighting US Bonds vs. International. 70/30 vs market weight 52/48
b) Sticking to Developed Markets investment grade bonds
c) For international bonds currency hedging back to USD.

Here is what i think some of the reasoning behind this is- starting with c)

c) Currency hedging: I think the idea is that as a US investor one should not expect to be compensated for bearing currency risk. So it is best to get rid of the risk by hedging it away.

b) Excluding emerging market bonds and below investment grade bonds: I think this falls under "take your risk on the equity side".
a) I think they did a study where they found this mix was optimal from a risk/reward perspective.

cheers,
grok

Fantastic post. My goal for holding bonds is for stability for a lost decade. It's entirely possible we get another situation like 2000-2012 where stocks have negative real returns. For that medium term, I like the fact that I am holding more riskier bonds, at market weight, that will provide better return for that decade plus of negative stock returns.

Of course there is always a sudden quick crash like the financial crisis or the covid crash, but for that small window of a few years I'd rather have some cash/tips saved up.

[Valuethinker]

Do you mean:

- there are only Investment Grade bonds in the index? (So that's c 20 countries including all the others in the G8 - Japan, Canada, Australia, UK, Germany, France, Italy etc) and you would prefer it if the index included non IG countries?

Yes! Also a lot of countries have bonds from corporations that fall below investment grade, like fallen angels, that get ignored and instead I'd prefer to include them at market weight. Same with ignoring emerging markets. A lot of them are investment grade but still ignored. And there is even controversy over some like India over their credit rating which I won't discuss for off topic reasons.A type of universal index, which exists in America (iShares has it with IUSB) has yet to be created internationally.

The problem from investability would be very great?

There's just not liquidity in a lot of the corporate bonds out there. Let alone sub investment grade.

I imagine some of the smaller countries, at least to get full index replication - would be very difficult.

One could of course use swaps - but then one is taking on the credit risk of the investment banks on the other side of the deal. So cue the old argument about actual v synthetic replication.

I think, in the end, what would be feasible would be a sort of Vanguard Total Bond Market fund but for international? I.e. in effect an actively managed fund - concentrating on liquid parts of these markets, making its own arbitrary decisions about sectoral weightings. (At least I think that's how TBM does it). But with passive-type fees/ expense ratio.