The overseas investable bond market has grown over the past decade, and currently accounts for more than 35% of the world’s investable market, according to Vanguard research. However, many U.S. investors are not investing in these securities. In a recent Vanguard research paper, Global fixed income: Considerations for U.S. investors, authors Joe Davis, Andrew Patterson, Chris Philips, and Chuck Thomas take a look at the impact of adding international bonds to one’s portfolio.
Some of the research findings:
– While the bonds from a single country could be more volatile than similar bonds in the United States, an investment that includes the bonds of all countries and issuers (through an exchange traded fund, for example) could be beneficial.
– In aggregate, and with the appropriate hedging of currency risk, an investment in the broad international bond market can be less volatile than an investment in the broad U.S. bond market. When the effect of currency exposure is removed, international bonds assume a return profile that is much more “bond-like.”
– Exposure to international risk factors may be worthwhile if the outlook for the U.S. fixed income market is poor. In addition, exposure to international bonds could offer long-term diversification benefits if international and U.S. market factors are significantly different, on average, over time.