Global Bonds: Protection in Down Markets

As US Treasury yields continue to plumb record lows, some have quipped that government bonds have gone from offering risk-free returns to “return-free risk.” Indeed, when interest rates inevitably rise from their current levels, bondholders face the prospect of poor or even negative returns.

One way for investors to mitigate such a risk is by globally diversifying their bond holdings.

Currency-hedged global bonds have historically been much less risky than unhedged global bonds, while delivering competitive returns, as we’ve written before here. Furthermore, hedged global bonds have captured most of the upside of US bond returns while offering greater resilience in down markets.

Since 1990, US bonds have averaged returns of 2.5% in positive-return quarters; global bonds offered 2.3% in the same quarters, capturing 92% of the upside of US bonds, as the display below shows. That’s because global government bonds tend to move together in widespread flights to quality. This year, for example, German Bunds have followed US Treasury yields to record lows.Global Bonds Are More Resilient to Down Markets over the Long Term

In adverse bond markets, however, there has historically been a greater performance gap, with global bonds faring significantly better than US bonds. While US bonds declined 1.1% on average in down quarters, global bonds lost only 0.7%. That’s 62% of the downside of US bonds—a significant advantage.

The reason? A diversified global strategy has been effective historically because economic cycles aren’t perfectly synchronized across countries. This means that interest-rate cycles differ, too. A global approach allows investors to reduce their portfolio’s sensitivity to the rate cycle of their home market.

Of course, diversification does not eliminate the risk of losses, but given the benefits that we’ve outlined, we think it’s prudent for investors to think about going global in their bond holdings.

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 Chief Investment Officer and Head of Fixed Income at AllianceBernstein.

Douglas J. Peebles

Douglas J. Peebles joined the firm in 1987 and is the Chief Investment Officer of AB Fixed Income. In this role, he supervises all of the Fixed Income portfolio-management and research teams globally. In addition, Peebles is Chairman of the Interest Rates and Currencies Research Review team, which is responsible for setting interest-rate and currency policy for all fixed-income portfolios. He has held several leadership positions within the fixed-income division, having served as director of Global Fixed Income from 1997 to 2004, and then co-head of AllianceBernstein Fixed Income from 2004 until August 2008. He earned a BA from Muhlenberg College and an MBA from Rutgers University. Location: New York

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