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    GSAM Connect 
    |
    September 18, 2015

    GSAM Connect | September 18, 2015

    Three Reasons to Consider Global Bonds Now

    For many investors, the domestic bonds which make up the Barclays US Aggregate Bond Index have been the cornerstone of a “core” bond allocation. While this approach may have served investors well in the past, we believe a changing fixed-income landscape may prompt investors to consider new approaches, including expanding their horizons to international bonds.

    We believe investors exploring new strategies should understand three potential benefits of diversifying their core bond holdings beyond benchmarks such as the Barclays US Aggregate Bond Index into global bonds – and that they should understand the potential role of currencies and currency-hedged bond allocations. Let’s explore three reasons we believe global bonds are worth investors’ attention now:

    EXHIBIT 1: THE BOND MARKET IS GLOBAL

    The Bond Market is Global

    Chart Source: Barclays Live. As of 6/30/15. Other refers to countries with less than 0.5% exposure. Past performance does not guarantee future results, which may vary.

    1.   Today’s opportunity set is global. With historically low interest rates and the potential for rate increases by the Federal Reserve in the coming months and years, many investors may see limited opportunity in US fixed income. We would point out that the US market is only part of the story of global bonds. Worldwide, other major central banks’ monetary policy remains accommodative. In our view, the European Central Bank (ECB), to take one example, may not enact tighter policy for years. We believe the policy divergence between the US and other world central banks may create diverse potential return opportunities for global bond portfolios. 

    EXHIBIT 2: US INTEREST RATE RISK VERSUS GLOBAL INTEREST RATE RISK

    Interest Rate Risk Versus

    Source: Barclays Live as of 6/30/15. Please reference additional disclosures.

    2.   Going global may help investors diversify interest rate risk. We believe a portfolio’s sensitivity to US interest rates matters. Although the currency-hedged global bond benchmark the Barclays Global Aggregate USD-Hedged Index has a higher overall duration than the Barclays US Aggregate Bond Index, this index’s sensitivity to US rates has been smaller. For US investors with a “home country bias,” we believe that global bonds provide investors with the potential opportunity to diversify their US interest rate risk into global rate risk.

    3.   The balance between risk and return matters in bond portfolios. We believe investors should be careful judges of returns relative to the risks they assume. Over the last 10 years, the Barclays Global Aggregate USD-Hedged Index has delivered returns comparable to core US bonds, as measured by the Barclays US Aggregate Bond Index. But these returns have been achieved with 20% less volatility (as measured by annualized volatility over the 10-year period). We believe that currency exposures matter – and that currency hedging may help investors build a global bond portfolio with more acceptable levels of risk than an unhedged portfolio.

    As Exhibit 3 shows, the historical risk of unhedged global bonds has been higher than a hedged allocation – which we view as a reflection of the higher volatility of foreign currencies versus the US Dollar. For investors who believe that the US Dollar’s lower volatility will continue (or those who believe that the US Dollar’s strengthening trend since 2014 will continue), we believe these characteristics are arguments for incorporating global bonds into a core fixed income allocation.

    In sum, we believe global bond exposure can help enhance investors’ core bond holdings by seeking to deliver additional country and interest rate diversification, while maintaining a similar risk/return profile to that of traditional core fixed income.

    EXHIBIT 3: HISTORICAL RISK AND RETURN OF GLOBAL BONDS VERSUS US BONDS

    Historical Risk and Return of Global

    Source: Morningstar. 10-Year Annualized total net returns as of 6/30/15.

    Topics: Interest Rates, Fixed Income, Euro, Market Strategy, Currencies, Europe, Diversifiers, Volatility, Diversification, ECB, Asset Allocation, Core, North America, Government Bonds

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