jefmafnl wrote: ↑Tue Jan 03, 2023 7:05 am
We (US citizens, retired, living in Europe) are looking for a non-US bond fund to protect us against a weaker dollar in the future. Our financial planner suggests investment grade rather than government bonds, but the options are limited and we're skeptical that the higher yields justify the higher expense ratios.
Could anyone please suggest a data source about the historical yield spreads of foreign corporate bonds over foreign government bonds?
Once upon a time, money was gold/silver, worth its weight. Kings/State would borrow that gold (money) in return for paying interest and broadly inflation averaged 0%.
That ended in the 1930's, first in the UK (1931), followed by the US in 1933. Money became 'fiat'. For international trade purposes the US Dollar became the accepted alternative to gold, where the US promised to peg the US dollar to gold. But as with all fiat currencies that promise didn't sustain.
When someone (states) can print/spend money as it is no longer backed by anything tangible, so the tendency is that sooner or later money will be printed/spend, that devalues all other notes in circulation. Such 'sovereign' states no longer need to borrow money, they can just print it. The same nowadays also holds true for banks, when you borrow money they just 'create it'. No longer need to match lenders/borrowers. Pension funds may be obligated to lend to the state, as in combination inflation (which is just another form of taxation) and direct taxation is beneficial to the state.
Bank of Japan mostly buys up all of the debt that it state issues. As is similar but to less extremes in other countries, UK, US, ...etc. States nor banks no longer need to borrow and accordingly pay little for such offers/lending, maybe even negative real yields after inflation/taxation for those that do.
Better currencies/monies are those that are backed by something tangible, such as stocks and/or gold. Currencies such as Yen, Pounds, Dollars are just a convenient way to avoid having to barter.
Corporate bonds are little different, pay more interest than treasuries in reflection of higher default risk. But are more in need of such loans, cannot print/spend money directly themselves such like how the state and banks can.
Circumstances have changed. Pre 1930's and lending money (gold) to the state was a reasonable choice, you were inclined to yield a positive real return from doing so. Since the 1930's however and you needed to invest elsewhere rather than lending to entities that can direct inflation (print/spend money), taxation, interest rates and/or change the rules.
A better choice IMO is to hold tangible assets, stocks and gold. How much, well 80/20 perhaps. If 80 stock value halves to 40, when 20 gold doubles to 40, then you have the option to sell gold to buy stocks, where you can double up on the number of shares being held. What might drive such a stocks halving, well often fiat currency concerns/risk, when the currency declines, inflation and interest rates rise, as does the price of gold in that currency tend to rise.
You can revise those weightings down if you like, to perhaps 50/50 stock/gold, half fiat currency (US$ invested in US stocks, gold non-fiat global currency), which also dials down counter party risk (gold in-hand has no counter party risk). You might even dial down that to maybe even include some treasury bonds if you don't mind the drag that is inclined to induce. The Permanent Portfolio for instance opts for half in 50/50 stock/gold and half in treasuries (it prefers to hold a 1 and 20 year treasury barbell than a 10 year central bullet). Whilst you could opt for corporate bonds, they have greater risk of potential partial, maybe total, failure to be repaid.
Non-US bonds/treasuries have even higher risk than US bond/treasuries. Lending nowadays is akin to lending to someone where the terms and conditions are heavily biased in their favor and where paper notes and steel based coins are worth near nothing. Better to hold tangible assets, the likes of stocks and gold. Weighting gold according to how much of a hedge you wish to place against possible declines in the US$