Diversifying Your Portfolio with Global Bonds: A Look at Non-U.S. Bonds
Investors have been enjoying attractive yields in the U.S. bond market, but some portfolio managers are suggesting that now might be a good time to look outside of the home market to diversify a portfolio. One advocate of investing in foreign credit is Rick Rieder, BlackRock’s chief investment officer of global fixed income.
Rieder’s BlackRock Flexible Income ETF (BINC) boasts a 5.57% 30-day SEC yield and holds assets in Europe, the U.K., and emerging markets. With about 19% of the portfolio in investment grade corporate bonds and 35% in high yield, BINC offers investors a diverse range of options.
One of the reasons Rieder is bullish on European bonds is the strength of the U.S. dollar, which gives these bonds an additional yield. Additionally, he expects the European Central Bank to move faster than the Federal Reserve in lowering interest rates, creating an attractive opportunity for investors.
Before diving into non-U.S. bonds, it’s important to assess your current foreign exposure and determine how much you want to allocate to international bonds. Collin Martin, fixed income strategist at Schwab Center for Financial Research, suggests keeping the allocation to both developed and emerging market non-U.S. debt to a total of 10% or less of a portfolio.
While Martin is neutral on developed market bonds at the moment, he finds emerging market debt relatively attractive, offering a yield advantage over U.S. bonds and the potential for currency appreciation.
Investors looking to add exposure to foreign bonds can consider global bond funds, which come in hedged and unhedged options. Hedged funds reduce currency risk by hedging foreign currency exposure back to the U.S. dollar, while unhedged funds may include foreign bonds issued in local currencies.
When investing in global bond funds, it’s essential to pay attention to factors like duration, sector exposure, and the amount of emerging market debt included in the portfolio. The currency risk is real, and understanding how it can impact your investments is crucial for success.
Morningstar’s top picks for global bond exposure include Pimco’s strategies, which keep non-U.S. currency exposure hedged back to the U.S. dollar but also incorporate tactical currency bets. BlackRock’s Strategic Global Bond Fund and Dodge & Cox’s Global Bond Fund are also top-rated options for investors looking to diversify with global bonds.
Overall, investing in non-U.S. bonds can provide additional income and diversification to a portfolio, but it’s essential to understand the risks and opportunities associated with global bond investing. Stay informed, stay diversified, and leverage the expertise of top-rated fund managers to make the most of your investment strategy.
