Going global with bonds

April 27, 2018

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Todd Schlanger

Todd Schlanger
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In this paper, we look at the benefits of allocating more of an investor's portfolio to hedged global bonds in the United States, Canada, United Kingdom, the euro area, and Australia. Similar points can be made for an even greater number of markets. We start by putting the current global investment-grade fixed income landscape into perspective and considering the diversification benefits that can be achieved from reducing market-specific risk factors. We then discuss the importance of hedging the currency risk from both a risk and a return perspective. Finally, we explore factors that can influence sizing a global bond allocation, such as relevant home bias considerations and the potential for reducing volatility.

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  • Investments in bonds are subject to interest rate, credit, and inflation risk.
  • The global bond market is subject to currency hedging risk, which is the chance that currency hedging transactions may not perfectly offset foreign currency exposures and may eliminate any chance to benefit from favorable fluctuations in relevant currency exchange rates. A fund will incur expenses to hedge its currency exposures.
  • Diversification does not ensure a profit or protect against a loss.
  • All investing is subject to risk, including possible loss of principal.
  • Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.