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Government Bonds Have Provided Critical Support Portfolio Strategies

As the coronavirus crisis derailed equity markets around the world, bonds – government bonds, in particular – have providing critical support for portfolio strategies.

 

 

By James Picerno

If ever there was a case for a fixed-income allocation, 2020 has delivered the goods in no uncertain terms in 2020. As the coronavirus crisis derailed equity markets around the world, bonds – government bonds, in particular – have providing critical support for portfolio strategies. But for US investors, the fixed-income edge has been primarily a domestic phenomenon. Foreign bonds, by contrast, have posted weak gains at best so far this year (through June 11), based on a set of proxy ETFs.

Corporates and intermediate governments in the foreign space are up modestly in 2020. But due to foreign-exchange risk and other factors, most of the offshore bond realm has lost ground year to date from the perspective of US-based investors measuring results through a select group of ETFs.

By contrast, the US fixed-income benchmark has posted a solid gain so far in 2020. Vanguard Total US Bond Market (NYSEARCA:BND) is ahead 5.8% through Wednesday’s close (red line). As the chart below shows, that’s well ahead of the broadly defined international bond category.

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The foreign-bond benchmark is also in positive terrain year to date. But even after hedging out forex risk, Vanguard Total International Bond (BNDX) has posted a weak gain – a relatively soft 1.8% total return through June 10 (blue line).

Although BNDX hedges out forex risk, it’s not obvious that exposing a foreign bond portfolio to the currency factor has been helpful this year from a US-investor perspective. The rest of the bond funds in the chart above (other than BNDX) are mostly unhedged bond portfolios.

The strongest year-to-date performer (other than the international benchmark fund) is Invesco International Corporate Bond (PICB), which is up 1.4% so far this year. The second-best performer: SPDR Bloomberg Barclays International Treasury Bond (BWX), ahead by 1.2% this year.

The biggest year-to-date loser: VanEck Vectors JP Morgan EM Local Currency Bond (EMLC), which is down 4.8%.

In theory, holding foreign bonds denominated in local currencies offers a diversification tool relative to US assets denominated in dollars. There’s merit in that view, at least in some cases, depending on how a portfolio is designed and managed. Nonetheless, for US investors tapping ETFs to access foreign bond risk, 2020 so far hasn’t been an encouraging year.