Looking Toward Non US Bonds

August 27, 2014

LEMB EMLC EBND EMB
Duration 4.3 4.8 4.8 7.3
Yield 5.6 6.2 5.7 4.9
Rating BBB+ BBB+ BBB+ BBB-
. .
South Korea 23.50 Poland 10.53 Brazil 14.33 Turkey 5.73
Brazil 17.51 South Africa 9.50 South Korea 13.80 Brazil 5.44
Thailand 4.89 Malaysia 8.79 Poland 7.49 Indonesia 5.44
South Africa 4.89 Turkey 8.23 Malaysia 6.59 Philippines 5.40
Malaysia 4.87 Russia 6.95 Thailand 5.05 Russia 4.88
Colombia 4.83 Mexico 6.54 South Africa 5.03 Colombia 4.58
Russia 4.79 Indonesia 6.45 Colombia 4.97 China 4.34
Indonesia 4.79 Brazil 6.25 Indonesia 4.94 Hungary 4.09
Israel 4.76 Thailand 6.10 Israel 4.93 Venezuela 3.90
Turkey 4.60 Colombia 5.87 Turkey 4.90 Poland 3.74

A few notes of difference:

  • Duration of the local-currency ETFs is much shorter than that of the dollar-denominated because of the issuer’s ability to use, and investor interest in, longer-term debt in non-USD form
  • The local currency average rating is higher because of the higher stability needed for the country to be able to issue and to attract investors for non-USD debt
  • The yield is higher because market rates are determined locally versus being “pegged” to the U.S. curve in the USD-denominated bonds
  • The local currency ETFs have more single-country risk based on size of country/issuance in the local currency

Stepping back to the developed side, there is a lack of currency-hedged products available. The largest in the space is the Vanguard Total International Bond ETF (BNDX | B-53), which tracks the broad non-U.S. aggregate bond index. Also, Pimco recently announced the launch of an actively managed dollar-hedged product, the Pimco Foreign Bond Active ETF.

While the currency exposure can have a diversifying effect comparing a U.S. versus a hedged non-U.S. portfolio, it can also lead to greater volatility.

Here’s a quick year-to-date example using the Global Aggregate ex-USD Float Adjusted RIC Capped Index, the benchmark that underlies Vanguard’s BNDX. We’ll look at it on an unhedged (BGRCTRUU) and hedged (BGRCTRUH) basis. Also, I’ve compared those two versions of the index with the Barclays U.S. Aggregate Bond Index (LBUSTRUU).

 

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