International bonds offer ingress into debt issue diversification overseas, but some caution is warranted given that a U.S. election is forthcoming. As such, it may be best to stick with developed markets, but the bold can always consider emerging markets to appease their risk appetite.
In either scenario, international bonds have been seeing heightened interest. As mentioned, developed markets in particular have been seeing greater demand as investors seek ways to diversify their fixed income portfolios.
“International bonds, particularly those from stable, developed markets like Europe and Japan, offer U.S.-based investors a way to diversify amid shifting U.S. interest rates,” Disruption Banking noted, adding that in 2023, “Bloomberg’s Global Aggregate Bond Index experienced a notable rebound, rising approximately 3.7% year-to-date, reflecting increased interest from U.S. investors in global bond diversification.”
Given the U.S. Federal Reserve’s challenge of easing monetary policy and ensuring a “soft landing” for the economy, yields in U.S. debt have been fluctuating. International bonds can offer a reprieve from the volatility.
“This trend spells out a strategic shift toward spreading risk internationally, particularly as U.S. yields remain volatile,” they added further.
For those not averse to risk, EM bonds are still an option for their attractive yield. If the global trends skews towards falling interest rates in developed markets, EM can always quell the hunger for yield.
As Disruption Banking also mentioned, “the appeal of emerging market bonds remains tempered by the Fed’s rate increases, which strengthen the dollar and complicate debt repayment in dollar-denominated bonds.” They cited Brazil is a prime example as the country’s benchmark 10-year bond yield went “above 12% in 2024, highlighting both attractive yields and the economic risks tied to its fiscal landscape.”
2 Options from Vanguard
To stay primarily in the developed markets without U.S. debt mixed in, consider the Vanguard Total International Bond Index Fund ETF Shares (BNDX ). BNDX seeks to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index. Its portfolio is primarily investment-grade debt, so credit risk is minimized.
For those seeking yield and don’t mind the additional credit risk that emerging markets can bring, then there’s also the Vanguard Emerging Markets Government Bond ETF (VWOB ) to consider. The fund tracks the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index. The index specifically measures the investment return of U.S.-dollar-denominated bonds issued by governments and government-related issuers in EM countries.
For more news, information, and analysis, visit the Fixed Income Channel.
