Go global (and hedge) in pursuit of a better bond portfolio

Quick Read

• Global government bonds that are US$-hedged have historically delivered higher returns and lower volatility compared to similar US-only bond indices. They also offer more attractive equity diversification compared to bond indices that contain corporate credit.
• US investors have historically held low allocations to global government bonds and have therefore missed out on a diversifying source of returns (and yield pick-up) that may be particularly valuable in this era of rising risks for the US Treasury market.

Hedged foreign yields are typically higher than the yields of US-only bond indices

US$-hedged global government bonds have delivered superior risk-adjusted returns

Hedged government bond indices are more diversifying to equities

In our view, an allocation to US$-hedged global government bonds is a strong complement to the fixed income portfolio of the typical US asset allocator. A global government bond index provides exposure to a diverse set of sovereign issuers and their associated macro fundamentals of growth, inflation and policy. Hedging the foreign exchange risk lowers portfolio volatility and provides a yield uplift when US$ cash rates are high, relative to foreign markets. Additionally, these benefits of a hedged global government bond index come without corporate credit risk and the higher equity correlation associated with fixed income allocations that contain corporate bonds.

Along with the strategic advantages of a global government bond allocation, we also see tactical reasons to pursue greater diversification within fixed income exposures – in particular, elevated US inflation, profligate US fiscal policy and a Federal Reserve that continues to sell long-dated US Treasuries in its QT program.

The Morningstar Rating™ for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life sub-accounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10 of products in each product category receive 5 stars, the next 22.5 receive 4 stars, the next 35 receive 3 stars, the next 22.5 receive 2 stars, and the bottom 10 receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100 three-year rating for 36-59 months of total returns, 60 five-year rating/40 three-year rating for 60-119 months of total returns, and 50 10-year rating/30 five-year rating/20 three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. Past performance does not guarantee future results.

To obtain more information on the funds, including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and current month-end, please click on the fund product profile page above.