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
Douglas J. Peebles is Chief Investment Officer, a Partner of the firm, and Head of Fixed Income, focusing on AB’s fixed-income investment processes, strategy and performance across portfolios globally. As CIO, he is also Co-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. In addition, Peebles serves as Lead Portfolio Manager for AB’s Unconstrained Bond Strategy, and focuses on managing the firm’s strategic client relationships. In 1997, he pioneered AB’s highly successful and innovative approach to global multi-sector high-income investing, which is now being adopted by other firms. Since joining the firm in 1987, Peebles has held several leadership positions, including director of Global Fixed Income (1997¬–2004), co-head of Fixed Income (2004–2008), and his current position (Head of Fixed Income), which he assumed in 2008. He holds a BA from Muhlenberg College and an MBA from Rutgers University. Location: New York