Vanguard leaders discuss their outlook for the international bond market


Jonathan Lemco of Vanguard Investment Strategy Group and Vanguard Chief European Economist Peter Westaway discuss their outlook for the international bond market.

Notes:
All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your minimum investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issued by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. These risks are especially high in emerging markets.
Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.
Investments in bonds are subject to interest rate, credit, and inflation risk.
For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, or other important information are contained in the prospectus; read it carefully before investing.
This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.
© 2016 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.


TRANSCRIPT

 
Rebecca Katz: Well, as we talked about the stock market a little bit, we have a question just in from Eugenia, who says, “What are the implications of all that we’ve presented so far to international bond funds, such as developed-country bond funds and emerging-market bond funds, which we offer here at Vanguard?” So how should investors in those funds think about things like negative interest rates and slower growth?

Jonathan Lemco: I think in a broad sense, international debt, international bonds, continue to provide attractive yields, the bottom line. Those countries that at Vanguard we tend to invest in are still predominantly investment-grade. So, therefore, default risk will be modest, they’re going to have decent macroeconomic performance we think, and they’re going to offer yields that are reasonably attractive and provide a buffer or alternative to equities. International debt should be, I would urge, a reasonable part, a part of any broadly diversified portfolio. Time and time again these countries have demonstrated reasonable fiscal prudence, adequate growth, as I said before. They are, for the most part, money good certainly on the fixed income side. And the Vanguard official view is somewhere about 20 to 40% of your entire portfolio should be international and perhaps 25% of that or so should be emerging markets. Give or take, it has everything to do with what your risk acceptance level is. How much risk you’re willing to take. But certainly for the last 20, 30-odd years, the large majority of these countries have proven to be very good credit risks and so, therefore, should be part of any balanced portfolio.

Rebecca Katz: And when you think—

Jonathan Lemco: Yes, go.

Peter Westaway: Can I just add a couple of things on that? I think one really important point to make for a U.S. investor is that very often international bonds will be hedged back into dollars. And very often that hedge will mean that the effective return you get as a U.S. investor will make it look a lot more like a U.S. yield so it basically turns it back into a positive yield.

Jonathan Lemco: Quite true.

Peter Westaway: Now, of course, that argument goes completely the other way if you’re in Europe because you then buy a U.S. bond and it turns it into a negative yield. But it’s basically the same argument. But I mean I think the point that Jonathan makes is important that whether you’re talking about yields that are slightly positive as they are in the U.S. or even negative, the fundamental property of having bonds in your portfolio is that they provide stability relative to equities and that they act as a counterweight to equities so when equities fall, bonds tend to rise. Now probably two years ago people started saying, “Surely that role for bonds isn’t going to work anymore because interest rates are down at 2%, 1%. Surely they can’t act as a counterweight because interest rates can’t fall any further.” And how wrong we were. You know, they have fallen further. We thought there was a floor at zero. So I think the danger with negative interest rates, and, again, I think having a diversified portfolio rather than just having one country’s bonds in your portfolio is really important because interest rates don’t all move up and down together at the same time. And that’s the key point.

Rebecca Katz: The question I was going to ask because it was such a surprise to me is that when you think about the global bond market, the U.S. is actually a minority of that portfolio.

Jonathan Lemco: Oh, yes.

Peter Westaway: Yes, yes.

Rebecca Katz: There’s so many more assets in non-U.S. bonds, and it was very surprising for me that you would be ignoring a large chunk of the world if you didn’t have that.

Jonathan Lemco: There are more than 90 countries at present that issue U.S.-dollar-denominated debt in our marketplace, for example, and that doesn’t even include those that issue euro debt or Japanese yen denominators or so on. So the United States, in general, although we still have a predominant amount of dollar debt, still there are many, many other countries that issue debt and provide a broad array to investors to choose from.

Important information
All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your minimum investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issued by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. These risks are especially high in emerging markets.
Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments. Investments in bonds are subject to interest rate, credit, and inflation risk.
For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, or other important information are contained in the prospectus; read it carefully before investing.
This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.
© 2016 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.