International Bonds in a VP

[BearBones]

In addition to a US-based HB PP, I am implementing a separate VP with international exposure. Don't ask me why. Just a gut feeling that I should have assets in more than my home country.  This VP is a bit PPesque in that it has cash (some in foreign bank), metals, and some international equity ETFs. But would some of you tell me that I should also have an international bond ETF or fund to keep things balanced? Or would you tell me that international bonds are expensive, cary significant default risk, and are designed for deflation while in fact "there is no such thing as global deflation?" (no bias here)

If you'd recommend international bonds, any ideas for a good fund or ETF? Not too thrilled with the upcoming Vanguard offerings, since hedged.

[BearBones]

Two other things:
This is in a taxable account.
The primary goal of a bond fund would be to add volatility uncorrelated with the other asset classes, just as bonds do in the HB PP.

[stone]

Bear Bones, I know you find mentions of MMT stuff anoying but I think it is worth sticking to bonds from currencies that are free floating and in the countries own currency. So avoid Euro and avoid USD denominated government bonds from EM countries as that is where default risk comes in.

There are ETFs with a diverse holding of government bonds in emerging market currencies (eg ELD). Those don't have default risk but do have massive currency risk BUT as you say that currency risk is volatility that could be rebalanced against say Yen currency or gold if you were also holding that. 

[BearBones]

Bear Bones, I know you find mentions of MMT stuff anoying but I think it is worth sticking to bonds from currencies that are free floating and in the countries own currency. So avoid Euro and avoid USD denominated government bonds from EM countries as that is where default risk comes in.

There are ETFs with a diverse holding of government bonds in emerging market currencies (eg ELD). Those don't have default risk but do have massive currency risk BUT as you say that currency risk is volatility that could be rebalanced against say Yen currency or gold if you were also holding that. 

Thanks for the help, Stone. No, I do not find the MMT stuff annoying. Just don't get it, since I have not spent the time to wrap my brain around it. I do have an aversion to bonds, though, so considering some international bonds is a big leap of faith in not being able to predict the future and needing uncorrelated assets. Problem is this is a taxable account and I am in a high bracket, so much of the interest will be eaten up. And I won't want to do a lot of rebalancing.

Also, Craig's post from another thread gives me second thoughts.

Here are some more bond funds to avoid:

4) Junk Bonds
5) Inflation indexed bonds
6) Foreign inflation indexed bonds
7) Emerging market bonds

Here is the closest I have seen come to discussing international bond exposure, and it is pretty negative (including my own posts).
http://gyroscopicinvesting.com/forum/ht ... ic.php?t=6

[stone]

Bear Bones, to be honest, for myself, I think gold does much of what international bonds might do but with less costs. If you really want a "risk off" allocation within an "international portfolio" then looking into holding some Yen currency might be the best bet. The Yen seems to strengthen a lot whenever fear takes over.

[BearBones]

Bear Bones, to be honest, for myself, I think gold does much of what international bonds might do but with less costs. If you really want a "risk off" allocation within an "international portfolio" then looking into holding some Yen currency might be the best bet. The Yen seems to strengthen a lot whenever fear takes over.

Thanks, Stone. That somehow sits better in my stomach. Anyone else agree that I should just stick with gold or add Yen currency in developing a VP with international equities?

[MachineGhost]

If you'd recommend international bonds, any ideas for a good fund or ETF? Not too thrilled with the upcoming Vanguard offerings, since hedged.

https://www.spdrs.com/product/fund.seam?ticker=BWX

But, I would examine the holdings to make sure there are not countries included with fixed exchanges rates, convertibility or foreign-denominated debt, i.e. the big issues that have historically caused countries to default.

MMT just means that if a country has a printing press with no limitations as I just described, there is no solvency risk.

MG

[stone]

MG, if that is the one that Clive mentioned before then it has lots of Italian government bonds and those do have default risk because anyone with Euros can choose to buy German or Dutch or Finish government bonds rather than buying Italian bonds.

[BearBones]

MG, if that is the one that Clive mentioned before then it has lots of Italian government bonds and those do have default risk because anyone with Euros can choose to buy German or Dutch or Finish government bonds rather than buying Italian bonds.

If I end up venturing into foreign bond ETFs, this might be good, except largely European.
Holdings 647
Ave Maturity 9.05
Mod Adj Duration 6.94
Countries:
Japan 23%
UK 12
France 10
Belgium 5
Spain 5
Canada 5
Germany 5
Netherlands 5
Italy 4
Australia 4
Austria 4
Denmark 4

[Ad Orientem]

I'm pretty happy with gold for my currency hedge.  But if I were inclined to look at foreign bonds for VP purposes I would probably encourage using a mutual fund, unless you are exceptionally well versed in currency trading and or have a lot of background in international economics and really keep up on all the variables that can affect bond prices.  One of the consistently better performers with not outrageous Fees & Expenses is Templeton Global Bond Advantage Fund (TGBAX).  They do however have a rather steep minimum investment.  But be careful if you go it alone.  Unless you REALLY know what you are doing, foreign bond investing can be a quick way to lose a lot of money.  For the non-expert your odds might be better at the black jack table.

[BearBones]

Thanks for the response, Ad Orientem. I know absolutely nothing about foreign bonds or currency trading, so I am increasingly shying away from this idea. However, if assembling an international VP containing broad-based international stock ETF, some foreign currency (in my case, in Canada), and gold, how would one provide some protection for a deflationary environment?

An international PP has been discussed before, but I do not remember this being developed fully (or perhaps it was developed fully, and the consensus was not to do it).

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=3

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=6

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=0

[cabronjames]

[quote="BearBones"]
However, if assembling an international VP containing broad-based international stock ETF, some foreign currency (in my case, in Canada), and gold, how would one provide some protection for a deflationary environment?

It seems that for deflation protection, only 30+ yr sovereign bonds of a nation with a sovereign currency (eg. NOT Germany having the non-sovereign Euro currency) that is a major reserve currency other nations hold.  Broad diversification would likely be worse than sticking to a few reserve currency nations' bonds, or perhaps even just solely US' 30 yr bonds.  For example, in the 2008 financial crisis's "flight to quality", nobody was "fleeing" to buy 30 yr Mexican or Hungary sovereign bonds (if 30 yrs even exist for these nations); but they were buying US or Japan 30 yrs.

http://en.wikipedia.org/wiki/Reserve_currency
note that as of 2011, USD 61.7% & Euro 25.7% dominate foreign reserves.  UK & Japan have about 4%, Switzerland 0.1%.  Other nations like Canada that have low Debt-to-GDP & usually a trade surplus, seem like they could be a candidate, but iirc someone here noticed that in 2008 the Canadian 30 yr bond did not have as strong as a performance as the US 30 yr bond, whether measured in either a USD or CAD exchange rate perspective.

Perhaps there is a minimum size needed to be a major reserve currency & have a 30 yr bond market & attracts enough foreign interest & becomes "liquid" enough with lower bid-ask spreads.  Nations like Canada, Australia, Switzerland, S Korea may be too small.

[BearBones]

It seems that for deflation protection, only 30+ yr sovereign bonds of a nation with a sovereign currency (eg. NOT Germany having the non-sovereign Euro currency) that is a major reserve currency other nations hold.  Broad diversification would likely be worse than sticking to a few reserve currency nations' bonds, or perhaps even just solely US' 30 yr bonds.  For example, in the 2008 financial crisis's "flight to quality", nobody was "fleeing" to buy 30 yr Mexican or Hungary sovereign bonds (if 30 yrs even exist for these nations); but they were buying US or Japan 30 yrs...

...note that as of 2011, USD 61.7% & Euro 25.7% dominate foreign reserves.  UK & Japan have about 4%, Switzerland 0.1%.  Other nations like Canada that have low Debt-to-GDP & usually a trade surplus, seem like they could be a candidate, but iirc someone here noticed that in 2008 the Canadian 30 yr bond did not have as strong as a performance as the US 30 yr bond, whether measured in either a USD or CAD exchange rate perspective.

Perhaps there is a minimum size needed to be a major reserve currency & have a 30 yr bond market & attracts enough foreign interest & becomes "liquid" enough with lower bid-ask spreads.  Nations like Canada, Australia, Switzerland, S Korea may be too small.

Very useful insight. Unless someone else has a more convincing argument that international bonds play a valuable and role in an otherwise 4x4ish international PP, I think that I will stay away. Thanks!

[cabronjames]

I recall Clive had a post showing that returns for a US, UK, & Japan Perm Port.  He showed that the returns that returns were consistent in different currencies.  Eg the US Perm Port had similar returns in a US Dollar, UK Pound, & Japanese Yen perspective.

I recall some on here noting that if were to do Intl Perm Port, it should be for each nation, each rebalanced internally.  Eg. you could have a 1/3 each US Perm Port, UK Perm Port, JPN Perm Port.  Of course this may not be possible, or even if possible, have higher expense ratios.  For instance, in the US there is no fund that has say a TLT-version of UK or Japan (or Canada, Swiss, etc) 30 yr bonds.

[cabronjames]

What I do is a "Intl Perm Port" in a sense, but it is non-orthodox for the stock portion.  First, I do a cash-excluding "3X33" allocation.  My stock is globalized, a roughly equal mix bt VBR (US Small Value), VEA (ex-US developed), & VWO (emerging).  US 30 yr T-Bonds & Gold are among the most used reserve assets Internationally, so they are suitable in a "Intl PP" just as they are in a US PP.  I am more exposed if the USD gets stronger via other currencies.  I have more protection in some milder version of a Iceland 2008 scenario occurs, & the USD gets dramatically weaker.  I think it's unlikely for the USD to become any stronger a reserve currency than it already is.  Even if USD remains #1 reserve currency, its market share could drop from it's current high 61%.

Again I know this is "off the PP reservation", but it makes me feel more comfortable & more likely to stick with my allocation/approach.

The globalized stock also takes a "can't predict the future" stance on global business, offshore outsourcing, etc.  Consider

1. US widget industry selling to US customers
2. US widget industry selling to Indian customers
3. Indian widget industry selling to US customers
4. Indian widget industry selling to Indian customers

However the market share of the global widget industry evolves, I am "somwhat diversified" via having both VBR & VWO.

The globalized stock is also somewhat "demographically diversified", in that when the boomers in US, Euro, & Japan start selling off stocks to pay for retirement, VWO's Brazil/China/etc nations still have much more new middle-class accumulators than retirees selling off.

[BearBones]

What I do is a "Intl Perm Port" in a sense, but it is non-orthodox for the stock portion.  First, I do a cash-excluding "3X33" allocation.  My stock is globalized, a roughly equal mix bt VBR (US Small Value), VEA (ex-US developed), & VWO (emerging)...

Is this your "PP," or is it a separate VP? If the former, it is possible that the international equities could break down the inverse correlation between the other assets. Perhaps this is the reason for your other statement.

I recall some on here noting that if were to do Intl Perm Port, it should be for each nation, each rebalanced internally.

[cabronjames]

What I do is a "Intl Perm Port" in a sense, but it is non-orthodox for the stock portion.  First, I do a cash-excluding "3X33" allocation.  My stock is globalized, a roughly equal mix bt VBR (US Small Value), VEA (ex-US developed), & VWO (emerging)...

Is this your "PP," or is it a separate VP? If the former, it is possible that the international equities could break down the inverse correlation between the other assets.

This is my asset allocation aka my unorthodox version of PP.  I don't have a VP.