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With long-term U.S. Treasury yields swinging up and down, and uncertainty swirling around America’s debt and fiscal policy, investors might be asking: Is now the time to look beyond U.S. borders for fixed-income investments?
According to Rebecca Venter, senior fixed income product manager at Vanguard, that curiosity is warranted—and potentially overdue.
Key Takeaways
- Hedged foreign bonds can reduce risk and improve returns without sacrificing quality.
- High-quality international bonds might even yield more than their U.S. counterparts—if you know where (and how) to look for them.
- International fixed-income securities offer exposure to different economies, regulations, and market cycles that U.S. bonds can’t provide.
Why Foreign Bonds Are Having a Moment
U.S. fiscal concerns have fueled a fresh wave of interest in international bonds. “The main driver of renewed or new interest in allocating internationally is really the concerns around the direction of rates and the risks to Treasuries in the U.S.,” Venter said.
As 10-, 20-, and 30-year Treasury yields fluctuate with every fiscal headline, investors seeking more stability are looking overseas. Venter said investors are “thinking about how to diversify their portfolios globally and have broader exposure to high-quality government bonds that aren’t as exposed to this type of risk.”
It’s not just about dodging volatility. Vanguard’s research suggests that taking a global approach to fixed income can boost risk-adjusted returns long-term, even if returns fluctuate year to year.
Tip
Vanguard recommends that U.S. investors allocate about 30% of their fixed-income portfolios to international bonds, typically starting with developed market sovereign debt, Venter said.
Going Global for Stability
Global bond exposure doesn’t just mean different geographies; it means access to entirely different inflation regimes, regulatory structures, and economic cycles.
By taking more of a global perspective, you can be diversified across economic degrees, inflation cycles, yield curves, sector maturity, and credit quality, Venter said.
Vanguard Fund Options
Investors can access this diversification in multiple ways. Vanguard’s BNDX ETF, for instance, passively tracks high-quality international bonds and hedges currency exposure back to the U.S. dollar.
Meanwhile, actively managed options, like Vanguard’s Global Credit Bond Fund (VGCIX), aim to find the best opportunities everywhere in the market while keeping fees low.
“We don’t recommend currency risk be taken in your bond portfolio,” Venter said. “Currency movements are very volatile, especially in the short term, such that they can erode the diversifying benefits of fixed income.”
Hedging helps reduce that risk, and according to Venter, it typically adds very little cost.
Fidelity Fund Options
Fidelity also offers competitive choices. Fidelity’s Total International Bond Fund (FGBFX), for example, offers diversified, currency-hedged global bond exposure with a tilt toward higher-quality credit.
Even within emerging markets, which many investors assume are too risky, there’s more nuance.
“Some investors have the misconception that emerging markets are extremely risky,” Venter said. “They are more of a hybrid part of the market,” and about half of them are investment grade.
The Bottom Line
Diversifying into foreign bonds can give investors more than just peace of mind. It can offer better yields, greater portfolio resilience, and more fixed income opportunities.
“There may be years where international bonds outperform U.S. bonds, and there may be years where they slightly underperform,” Venter said. Over time, however, they can potentially help to improve your risk-adjusted returns.
Whether you start with a low-cost index fund like BNDX or explore global credit strategies with active managers, international fixed income securities can contribute to a well-rounded portfolio, especially when uncertainty at home pushes you to look abroad.
