Is US flirting with default a reason to buy more international bonds?

[nun]

For many years Vanguard Total Bond Index has been at the core of my bond allocation, and that contains a lot of US Government securities. After the last couple of weeks of Government shut down, flirtation with default and the possibility for continuing Congressional gridlock is anyone considering moving some money from Vanguard Total Bond Index to Vanguard Total International Bond Index.....or have you already done it?

 

[samclem]

IIRC, there was recently proposed legislation that would make it clear that the US Treasury has the authority and the responsibility to pay US debt obligations first (before entitlement payments, etc). Many people believe this legislation would be redundant and that the authority and responsibility to do this is already spelled out, but there is disagreement. If this legislation is no longer "alive", I would count on the issue being raised again after this recent dust-up. The issue will make for grand political theater and maybe nothing will get done, but it could impact the relative prices of various government securities and that may need to be factored into your decisionmaking (e.g. US government bonds become more safe if a law like this passes, which drives its price up and interest rates down, at least in theory). Current government receipts from all sources are easily sufficient to make all interest payments to borrowers if that spending is prioritized near the top.

In answer to the question: I don't own much USG debt, and haven't moved in or out of it. The FDIC depends on government funds, too, would we expect people to move out of CDs or for them to pay increased interest rates if people believe the guarantee is less than ironclad? Granted, the FDIC deposit guarantees are one step removed from a direct government interest payment.

 

[brewer12345]

I would not bother. If the US defaults, there will be a whole host of other sovereign disasters that will impact your international fund.

That said, foreign bonds that are not USD denominated make a nice diversifier.

 

[nun]

I would not bother. If the US defaults, there will be a whole host of other sovereign disasters that will impact your international fund.

That said, foreign bonds that are not USD denominated make a nice diversifier.

That was my general thinking. I diversify my stock investments with Total International, I'm inclined to do the same for my bonds. It's interesting that Vanguard includes Total International Bond Market Index in their "Core Funds" rather than thinking of it as a bit more esoteric.

 

[Texas Proud]

All this default talk and the ramifications of an actual default is a straw man IMO...

First, there already is a law that addresses the debt.... the 14th amendment.... there is question on how it would be implemented, but it is clear that the debt is valid...

So, put yourself in the treasury dept... which bill would you pay first I bet there is a big majority that would vote to pay the debt and not pay the other expenses that are in reality not debt (sorry, but SS and other autopilot payments are not actual debts of the gvmt.... sure, they are a promise to pay, but not a debt)....


Would I be worried that I would not get paid by the US gvmt No... However, I do think that it would be pretty stupid to not make all the promised payments.


As Brewer said, if the US actually did default, in the sense of a real default and not a made up one like we have here.... there would be very few places where you could hide your money from the huge decline in value.... foreign bonds would not be protecting you....

 

[samclem]

So, put yourself in the treasury dept... which bill would you pay first I bet there is a big majority that would vote to pay the debt and not pay the other expenses that are in reality not debt (sorry, but SS and other autopilot payments are not actual debts of the gvmt.... sure, they are a promise to pay, but not a debt)....

But the Treasury Dept doesn't get to decide. Their boss does. And there could be very important reasons that some elected officials would want to treat all of government spending as the same priority and to refuse to allow it to be prioritized. In the overheated parlance of today's discourse, bond holders are to be "held hostage" until the entire debt limit is raised.

On a positive note, there's at least a glimmer of hope that the Senate may pass its first budget since April, 2009 if this new conference committee gains some traction. We'll see.

 

[Brooks Saddle]

"That said, foreign bonds that are not USD denominated make a nice diversifier."

The Vanguard International Bond funds are hedged so currency fluctuations don't impact the bonds returns.

I've not left the total bond fund yet and I may not. If I did, I would most likely move to intermediate US corporates and not go abroad. I already have money in the Vanguard short term corporate.

 

[nun]

I've not left the total bond fund yet and I may not. If I did, I would most likely move to intermediate US corporates and not go abroad. I already have money in the Vanguard short term corporate.

Psst, Wellesley......I changed my allocation to include more intermediate corporate bonds about 5 years ago.

The mechanisms and pedantry of a US default depending on your definitions and proposals of who to pay first aren't really the issue. I think the Chinese are probably just a little less sanguine about having over a Trillion in T-bills after the last 2 weeks. I'm thinking the same as they are, a little diversification might be a good thing.

 

[foxfirev5]

To simply answer the question - No

 

[Texas Proud]

But the Treasury Dept doesn't get to decide. Their boss does. And there could be very important reasons that some elected officials would want to treat all of government spending as the same priority and to refuse to allow it to be prioritized. In the overheated parlance of today's discourse, bond holders are to be "held hostage" until the entire debt limit is raised.

On a positive note, there's at least a glimmer of hope that the Senate may pass its first budget since April, 2009 if this new conference committee gains some traction. We'll see.

That is one reason that some do not want to pass the law that would state the priority of payments.... but it will not pass....


One of my points is that the debt will be paid in full... at some time.... it is not like a company that can not meet their payment and the bondholder has to take a loss... now, I wonder what would happen to the balance if it lasted awhile... say a week or a month... would the treasury pay interest for that week or month

 

[haha]

Rob Arnott addresses this question of what would get paid

Rob Arnott

Arnott is a very intelligent and successful man in a field where you do not achieve success by managing to get to work on time for 30 years, unless of course it is a sick day. But I believe that he may be giving our great leaders more credit than they deserve when he says that when something must be fixed, it will be fixed. Did Spain address its problems after the Spanish Armada was defeated? How about Portugal, the Netherlands, or Britain? It was once said that sun never set on the British Empire, but that sun has long ago set.

I think the other and at least equally likely outcome in the US is empire collapse. As long as we are able to sell bonds denominated in USD, they will be paid. Ben has shown us that he was not kidding about the helicopter drops. But that condition of acceptance is not necessarily eternal.

Ha

 

[karluk]

It was once said that sun never set on the British Empire, but that sun has long ago set.
Ha

You might think so, but it turns out it's not true. According to the following link, the sun has yet to set on the British Empire.

Sunset on the British Empire

The Sun never sets on all fourteen British territories at once (or even thirteen, if you don’t count the British Antarctic Territory). However, if the UK loses one tiny territory, it will experience its first Empire-wide sunset in over two centuries.
Every night, around midnight GMT, the Sun sets on the Cayman Islands, and doesn't rise over the British Indian Ocean Territory until after 1:00 AM. For that hour, the little Pitcairn Islands in the South Pacific are the only British territory in the Sun.
The Pitcairn Islands have a population of a few dozen people, the descendants of the mutineers from the HMS Bounty. The islands became notorious in 2004 when a third of the adult male population, including the mayor, were convicted of child sexual abuse.
As awful as the islands may be, they remain part of the British Empire, and unless they're kicked out, the two-century-long British daylight will continue.

 

[galeno]

We also use one "total bond fund" for our bond portfolio. It's 90% US bonds. We're thinking about adding in a hedged "world bond fund" which is 50% US bonds.

The drawbacks for the "world bond fund": Costs 14 bps more. SEC Yields 24 bps less. And its duration is 1.81 years more.

These drawbacks are enough to keep us exclusively in the "total bond fund". The ER difference is unlikely to change. But if the "world bond fund" increases its SEC Yield or shortens its duration, new FI money will go there.

 

[haha]

You might think so, but it turns out it's not true. According to the following link, the sun has yet to set on the British Empire.

Sunset on the British Empire

Wow. Thank you for correcting me.

Ha

 

[Lsbcal]

If one is going to start allocating beyond an index then maybe having a smart manager do it is best. Pimco's Bill Gross runs Total Return (fund or etf) and has >10% in international currently. According to him, the "cleanest dirty shirts".

Link to ETF is this (and then select "composition" tab): PIMCO ETFs - PIMCO Total Return Exchange-Traded Fund

 

[ERD50]

You might think so, but it turns out it's not true. According to the following link, the sun has yet to set on the British Empire.

Sunset on the British Empire

I did not know that. I think back to the days they ruled India and so on. Forgot about places like the Falkland Islands, etc.

Pitcairn Island, a 2.2 mile island out about 1000 miles from others, and a population of 48? I'd go bonkers!

-ERD50

 

[karluk]

I did not know that. I think back to the days they ruled India and so on. Forgot about places like the Falkland Islands, etc.

Pitcairn Island, a 2.2 mile island out about 1000 miles from others, and a population of 48? I'd go bonkers!

-ERD50

The reason I know this bit of trivia is that I was under the mistaken impression that the sun would fall on the British Empire sometime in the 24 hours after Britain returned Hong Kong to China. I even went so far as to investigate where one would have to be in order to witness this historic event. Of course it turned out that the sun wasn't falling after all. But if the facts had turned out differently, I would have spent a memorable vacation on a beach in the western Cayman Islands, sipping margaritas and watching the sun sink into the sea.

 

[nun]

The reason I know this bit of trivia is that I was under the mistaken impression that the sun would fall on the British Empire sometime in the 24 hours after Britain returned Hong Kong to China. I even went so far as to investigate where one would have to be in order to witness this historic event. Of course it turned out that the sun wasn't falling after all. But if the facts had turned out differently, I would have spent a memorable vacation on a beach in the western Cayman Islands, sipping margaritas and watching the sun sink into the sea.

While the sun might still literally never set on the UK and it's colonies, in it's allegorical sense (which is more important in this case) it set a long time ago. The US's power will not decline as much or as rapidly as the UK's, but it will happen. The challenge is to realize it and adjust policy......unfortunately inertia, nationalism and hubris make that almost impossible.

 

[ERD50]

... The US's power will not decline as much or as rapidly as the UK's, ....

Why not?

-ERD50

 

[Texas Proud]

While the sun might still literally never set on the UK and it's colonies, in it's allegorical sense (which is more important in this case) it set a long time ago. The US's power will not decline as much or as rapidly as the UK's, but it will happen. The challenge is to realize it and adjust policy......unfortunately inertia, nationalism and hubris make that almost impossible.

It might or it might not.... but from a selfish perspective I really do not care.... it will not happen in my lifetime..

The decline of empires takes a long time... look at the Roman empire and the British empire....


And life goes on at both locations.... and many people would say quite nicely.... Since I lived in London for a few years, I can tell you that the standard of living is higher than a lot of places here in the good ole USA...

 

[pb4uski]

I dumped Total Bond in favor of the Intermediate Investment Grade fund a few years ago as USG bond yields were too pathetic for my liking and I was willing to take the additional credit risk.

I have ~20% of my fixed income portfolio in International Bond. It has performed better than the Intermediate Investment Grade it replaced so far, but I've only owned it since early June so it is too soon to tell.

 

[Lsbcal]

...(snip)...
And life goes on at both locations.... and many people would say quite nicely.... Since I lived in London for a few years, I can tell you that the standard of living is higher than a lot of places here in the good ole USA...

Impressive comment coming from a Texan.

BTW, we have a lot more natural resources then the Romans or British ever had.

 

[karluk]

While the sun might still literally never set on the UK and it's colonies, in it's allegorical sense (which is more important in this case) it set a long time ago.

Interesting take. I would say just the opposite - the literal decline of the British Empire has been MUCH more rapid and profound than the allegorical decline. Geographically, Britain today consists of a medium size island off the coast of Europe plus some insignificant overseas territories that add practically nothing to either its size or economy. Economically, however, Britain today has a top ten GDP and top five stock market. Ask yourself where you would choose to live if you had to pick an island country anywhere in the world. Of the world's major islands, the only obvious choices are Japan and Britain. Places like Greenland, Madagascar and New Guinea don't offer quite the same quality of life.

The breakup of the British Empire was a political reorganization, not an economic decline.

 

[nun]

Why not?

-ERD50

Geography and natural resources.

 

[samclem]

Of the world's major islands, the only obvious choices are Japan and Britain. Places like Greenland, Madagascar and New Guinea don't offer quite the same quality of life.

New Zealand? And although Australia is technically a continent, it's a one-nation continent. Like England, they speak a language I understand, so that would put 'em higher in my personal list of places I'd choose to live.