Bond investing, like equity investing, is an increasingly global proposition today. Opportunities are present all over the world. Yet unlike equity investors, who have generally embraced global investing, bond investors in many countries continue to put all their eggs in one basket by focusing primarily on their home debt markets. We think this is a mistake.
In most countries, global bonds have offered comparable historical returns to domestic bonds, with considerably lower volatility, as we showed in our previous post . This reduction in volatility shouldn’t come as a great surprise. Bond returns can vary wildly across different countries year by year, as the display below shows. For example, while Australia was the world’s best-performing major sovereign-debt market in 2008, it was the worst-performing for the next two years.
Since the economic fundamentals that affect the bond market—such as monetary policy and inflation—are not always in sync across different countries, returns tend to be highly dispersed. As a result, diversification across countries can help smooth the ride for bond investors. A global opportunity set also allows skilled investment managers to adjust portfolio risk dynamically by overweighting countries or regions where the potential compensation for risk is most generous—and underweighting countries or regions where expected return on risk is inadequate or simply less attractive.
In our view, fixed-income investors everywhere could improve their risk-adjusted returns by going global. But investors should understand that global bond portfolios are not all cut from the same cloth. Some act like core portfolios—useful diversifiers against risky assets such as equities. Other global bond funds act more like high yield, even if they don’t necessarily invest in high-yield bonds; their higher risk profile stems primarily from currency exposure.
In my next post, I will delve deeper into the risk of currency exposure in global bond portfolios.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Douglas J. Peebles is Head of Fixed Income at AllianceBernstein.