Developed market bonds

From the perspective of a U.S. domiciled investor, the international bond market makes up somewhat more than 35% of the market value of world investment markets (2011). The global market is commonly divided into developed market bonds and emerging market bonds. In many instances, many countries issue both nominal and inflation indexed debt securities.

Risk and return
Like all bonds, international bonds pay interest according to set schedules and return principal at maturity. In addition to risks common to all bonds (Bond Basics - Risks), international bonds bear currency risk unless this risk is hedged.

Table 1. below, derived from data provided by Dimson, Marsh, and Staunton in the Credit Suisse Global Investment Returns Yearbook 2011, provides real return,nominal return, and standard deviation of sovereign (treasury) bond returns for 19 countries from 1900-2000.

These long term returns rates smooth considerable periods of both good and bad performance of global bond markets. Dimson, Marsh, and Staunton provide returns data for extreme real returns throughout the 1900-2010 history. The episodes include world wars; deflation; inflation and hyperinflation; beating inflation; and a golden era. Table 2. below provides the returns data for these episodes. One should note that the global bond returns during the world wars include the returns of the losers (Germany in World War I (-75%) and Japan (-99%) in World War II) and that hyperinflation epoch returns are real returns of individual national markets.

Market index
The most recognized international developed market bond index is a subset of the Barclays Global Aggregate Index (also available in a float-adjusted version) which measures investment grade fixed-rate debt markets. The international developed market subset of the Global Aggregate Index consists of the following sub indexes:
 * Two major components
 * Pan-European Aggregate (EUR 300mn)
 * Asian-Pacific Aggregate Index (JPY 35bn).

The remainder of the index consists of Global Treasury(ex US treasuries), Eurodollar (USD 300mn), Euro-Yen (JPY 25bn), Canadian (USD 300mn equivalent) index-eligible securities not already in the two regional aggregate indices.

Barclays Capital also provides a benchmark for global inflation indexed bonds, the Barclays Capital World Government Inflation-Linked Bond Index. The international subset of this index includes bonds from UK, Australia, Canada, Sweden, France, Italy, Japan, and Germany.

Morgan Stanley, Citigroup, BofA Merrill Lynch, and Deutsche Bank also provide international developed market indexes.

Index funds
Indexed portfolios of international developed market bonds for U.S. domiciled investors are currently available from ETF providers iShares and State Street Global Advisors. The portfolios are unhedged. Vanguard offers hedged international developed market index funds to their English, European, and Asian domiciled investors, but not to their U.S. domiciled investors. Dimensional Fund Advisors offer hedged short and intermediate term global bond funds, available to do-it-yourself investors in some employer provided plans (as well as a 529 plan made available by the state of West Virginia.)