International Bonds Now Largest Asset Class in World Market

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This Vanguard article included an infographic (see below) that shows the growth of international bonds as an asset class. If you were to consider the world’s investable market as split between bonds and equities, internationally-issued bonds are now the largest piece of the pie at 35%. This includes both government and corporate bonds.

Vanguard believes that holding international bonds is an important way add diversification to your portfolio, and in mid-2013 added international bonds to their Target Date Retirement and LifeStrategy all-in-one mutual funds (currently 20% of the total bond allocation). The Vanguard Total International Bond Index Fund Investor Shares (VTIBX) has an 0.23% expense ratio. I’m still not convinced of their necessity and don’t own any foreign bonds. Back in 2000, international bonds were still 19% of the global market, yet they took up 0% (none) of their Target Retirement and LifeStrategy funds.

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  1. Where do these numbers come from? I’d really like to be able to check the weights of the asset classes regularly in the future so that I know how to rebalance.

  2. I think there’s probably some benefit to holding international bonds in a portfolio, especially when U.S. rates are so low. Though pure economic theory would say currency depreciation would perfectly offset any higher yield you can get abroad, empirically that has been demonstrated to be untrue over a number of time horizons.

    But market-cap weighting the total investable opportunity set in general is something you should be careful of, particularly when it comes to bonds. Pure market cap weighting would push you to have the largest exposure to the most indebted countries and companies, which probably isn’t very prudent.

  3. Bonds have had a long bull run but are now so expensive (with the government giving money away) that I see little point to investing in mainstream bond funds (e.g., Vanguard domestic / BND). A slight decline can wipe out lots of the expected profit, and the yields are tiny.

    As a result I’ve broken with the low-cost passive approach in favor of actively managed bond mutual funds. If you are adventurous and can tolerate 50% of the volatility of stock index funds, then consider Loomis Sayles Bond Fund (LSBRX). It mixes high quality with junk bonds, as well as domestic and international issues, plus it finds odd investments that are ignored by mainstream funds. LSBRX did crash along with stocks in 2008, but it came back strong.

  4. mysticaltyger says

    Just my opinion, but I like International/Global bond funds IF you can get them at a reasonable price. I have the low cost version of Templeton Global Bond in my workplace retirement plan and I love the fund. I also own Loomis Sayles Bond (which owns a lot of international bonds) in a taxable account. Love those funds!

    That said, interest rates are so low all over the world, I don’t expect future returns to be as good as they were over the last 10-15 years.

  5. @John

    And while I totally respect a different investment approach, I just don’t see an “upside” to any bonds/bond funds right now. Unless they’re uber-short term bonds with almost weekly turnovers, I see interest rates flat (i.e. make more money in an online savings account, which is still nil) or even rising.

    Once interest rates start to climb, bonds should be goose eggs for a long time to come, no? I just can’t get into them. 10 years ago, I was a little into them til about 2008. There’s just nowhere to go from zero, imho.

    I dunno, I don’t know where to put money right now besides equities. I just don’t see anything with earning/appreciation potential aside from maybe real estate. And not REIT’s, but actual roll-the-dice real estate. Buy property, rent & hope!

    Yes, I’m a pessimist. =c)

  6. While I follow very closely market capitalization for stocks. Bonds are suppose to be my safe money, and hence all I hold is short term Vanguard TIPs with just 0.10 expense ratio. They should mimic closest the rate of inflation and that’s all I expect from bonds. Beating inflation is for stocks.

  7. @Andy

    No, I know. I didn’t say I was going to actually mimic the exact market cap.

    But still, in 10 years, US bonds might only be %10 (or they might be 90%). But how will I know unless I can get some hard numbers? I don’t want to be holding 100% US bonds if they’re only 10% of the global bond pie.

    The original Vanguard article doesn’t cite any sources, and I can’t just hope that they’re going to put out a fancy infographic every few years.

  8. The Vanguard article supplies the name of indexes that they are using, and you can usually find the market cap of the index from the provider. Sometimes it takes some digging, however.

  9. @Red — Yes, absolutely. I agree with most of what you said. However, LSBRX is not like traditional bond funds. It’s more of a grab-bag of assets that the management team finds. It tends to perform better than ordinary bond funds, and functions more like a low volatility stock fund. I think of it as a diversification option, and a way to stay invested but (due to lower volatility) maintain a way of getting money out on short notice. It’s by no means as safe as an ordinary bond fund, but I could not care less. BTW, I’ve reduced my bond exposure too.

    @Serge — My truly safe money is in cash (high yield savings) right now.

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