Thoughts on global bond funds?

[rockyj]

For some time I've been adjusting my asset allocation by filling in the holes among some "legacy" holdings I had prior to developing current plan. As part of that process, and as I get closer to retirement, I want to shift a bit more from US large caps to bond funds. Current bonds are now in US intermediate in VG funds (spread among treasury, investment grade, and index). I am thinking of moving some American Funds now in Washington Mutual Investors Fund (large cap US) into Capital World Bond (diversified bonds - about 50% non-US gov't and about 15% non-US corp - the rest a mix of various US) to get some global bond exposure. As a percentage of investment accounts, the move would represent about 4% of total (i.e. reducing my large cap US by 4%, and adding 4% global mix (of which about 2/3 would be non-US)). These are in 403B, no taxes or new sales load for the move.

What I am wondering is how to think about global bonds as a diversifier? Am I just hedging on currency rates here and meanwhile exposing myself to additional volatility or other risks?

Does anyone have any thoughts on this and/or can anyone point me to some decent reading in this area? Most of the asset allocation reading I do tends to treat bonds as a US lump, or maybe discusses spreading among treasuries, TIPS, corporate, etc., for some US diversification. Perhaps that should be telling me something? Can anyone suggest particular no-load funds for doing this if useful?

Thanks for any suggestions.

 

[Lsbcal]

I think the idea is that bonds are suppose to be the safe part of your portfolio in a storm. Generally that means US Treasurys or short term investment grade or equivalent. Non-US Treasurys include currency risk. Personally I save the currency risk to combine with equity risk when putting 50% of equities in international funds. You might want to read Swedroe's bond book.

 

[brewer12345]

The historical data I have seen indicates that non-USD bonds are a nice diversifier. I thinkthey belong in every diversified portfolio. Having said that, this asset class has run up tremendously so tread carefully. I would not plunge in. Either DCA over a year or wait for a pullback.

 

[Lsbcal]

Hi Brewer, I'm curious as to what fund or etf you would suggest for non-US bonds.

Les

 

[brewer12345]

I like GIM the best, but it is currently trading at a premium. The time to buy is at a 5% or better discount. In the absence of GIM at a discount, BEGBX is decent. There are a few ETFs out there, but they have a short track record. Most interesting to me if it pans out is a non-USD inflation linked bond ETF (BWX?).

 

[rockyj]

Thanks for the comments, Les and Brewer. I put a request in to our library for Swedroe's bond book - and moving incrementally seems prudent.

 

[charlie]

I like GIM as well, but wait until after the 1st of January. GIM usually has a end of year extra dividend that could put a dent in the NAV, maybe as much as 10%. The price may or may not drop equally.

Cheers,

charlie

 

[traineeinvestor]

In recent times non-US bonds of a number of countries have benefitted from:

1. falling interest rates (driven by a combination of monetary easing and yield chasing/carry trade)
2. falling risk premiums as confidence returned
3. a falling US dollar

# 1 is already starting to reverse - Australia has upped its rates a few times
#2 has probably done all that it is going to do
#3 will not go on for ever (I hope!)

(Obviously, your mileage will vary depending on which countries you are looking at.)

This does not mean that they will be a bad investment, only that (IMHO) the best of the returns have already been made. (As a matter of disclosure, I am thinking about buying some NZ$ corporate bonds yielding around 7%.)

Regardless of the views on the merits of an asset class in isolation, the benefits to the portfolio as a whole need to be taken into account - will it provide non-correlated returns/rebalancing opportunities? I'd be interested in the answer to this one myself.