Going global with bonds: Unlocking diversification through global fixed income
How a hedged global fixed income allocation can help reduce a portfolio's volatility without necessarily decreasing its total return.
- Allocating to global bond markets broadens the opportunity set beyond domestic fixed income, providing exposure to a wider range of securities, issuers, markets, economic cycles and inflation environments. Theory tells us this broader opportunity set offers diversification, and can reduce portfolio volatility, without necessarily lowering expected returns.
- Across five major markets – the United States, Canada, the United Kingdom, the euro area and Australia – we find empirical evidence that supports the theory, with one critical qualifier: currency exposure should be hedged back to the investor’s home currency. Left unmanaged, currency movements can dominate bond returns and materially increase volatility, potentially undermining the stabilising role that fixed income is expected to play in investor portfolios.
- While the diversification benefits of hedged global bonds are clear, the appropriate strategic allocation split between domestic and international fixed income markets is investor-specific and should depend on factors such as the desire to mitigate risk, the cost of implementation and any tax incentives.
Going global with bonds: The benefits of a more global fixed income allocation
This whitepaper explores how currency-hedged global bonds can help broaden diversification, reduce risk and preserve the stabilising role of fixed income in investor portfolios – without necessarily sacrificing expected returns.
