Across the Universe
How Global Bonds Meet the Core Objective
July 15, 2013
Globalization has been a major trend in the fixed-income markets for the past three decades. Thirty-five years ago, US Treasuries and US corporate bonds dominated the global fixed-income universe. But today, despite huge US deficits and massive public debt, US Treasuries represent only about one-quarter of global sovereign debt outstanding. In 2012, more than half of outstanding global corporate credit was issued outside the US.
However, while the fixed-income markets have become global, investors have been reluctant to invest globally. US investors in particular still show a lot of home-country bias. The core bond strategy for most US-based institutional fixed-income investors remains US-centric.
The time has come to re-examine this bias. Over the last 30 years, compelling evidence has accumulated that suggests currency-hedged global bonds have a superior risk/return profile to US bonds, with more potential opportunities to add value. In addition, global bonds have historically provided better risk mitigation to US bonds and stocks during extreme downturns.
In this paper, we share the results of our analysis, in which we explain not only why we believe that investors should globalize some or all of their fixed-income assets (a compelling historical “up/down capture,” for example, as shown in the display below), but also why they should hedge non-US currency exposure, and how much of an allocation to global bonds is appropriate.
Global Bonds Have Preserved More Capital During Down Periods
Global Bonds’ Up Capture/Down Capture