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Think Twice About Foreign Bonds

International investing has increased over time and especially in recent years. There’s nothing wrong with investing abroad; it is a big world after all, with numerous investing opportunities and diversification potential.

That said, we have seen many a strategy or portfolio take international investing too far, especially when it becomes a mindless assumption that one’s wealth should be spread all over the globe and in proportion to market size (i.e. investing a majority of assets abroad since the U.S. makes up just 3% of the world’s population and 20% of its market value-and other similar narratives).

As most American investors spend in dollars (a relatively hard currency) and will continue to do so, currency risk alone should render this new dogma as risky and unnecessary.

This means bonds, too. We are seeing a lot of international bonds being bought in recent years and wonder if people realize exactly what yield they are getting for the risk taken. Long term bonds in many “emerging” nations are being issued under 5%- not enough compensation for currency risk and credit risk. In “developed” markets, where the market sees virtually no credit risk, yields are lower than U.S. bonds and even negative in the case of Switzerland.

10-Year Government Bond Rates today:

U.S.: 1.77%
U.K.: 1.46%
Canada: 1.27%
Japan: 0.36%
Germany: 0.34%
Switzerland: -0.20%

Many “modern” 401(k) allocation strategies have a portion in foreign income funds. But income, they do not get. For U.S. based investors, foreign bonds today are but a call option on deflation and/or a currency bet.

We pass.

About the Author

Neil Rose, CFA
President & Chief Investment Officer




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