This article explores how investors can benefit from buying global bonds – particularly those with currency hedging.
- Since 2011, a portfolio of Canadian dollar-hedged global government bonds has delivered a smoother experience for investors each year than a portfolio of Canadian government bonds.
- Going back 20 years, a portfolio of Canadian dollar-hedged global government bonds delivered a lower annualized rate of volatility than a portfolio of Canadian government bonds.
- Exposure to the vast market available outside of Canada provides greater diversification opportunities – and diversification generally lowers risk for investors.
Many investors would think that a global bond portfolio is likely to prove less stable than a Canadian bond portfolio. Surely government bonds issued in other parts of the world could not deliver a smoother ride than those made here in Canada, the thinking goes. But is this true?
The chart below shows that in every year since 2011, a portfolio of Canadian dollar-hedged global government bonds has delivered a smoother experience (less volatility) for investors than a portfolio of Canadian government bonds. The currency-hedged portfolio significantly reduced the impact of market swings – called volatility – over time.
When hedged, global bonds have generally been less volatile
Similarly, over the past 20 years, an unhedged global government bond portfolio had an annualized volatility of 9.3%. But when fully hedged, the portfolio had less than half of the volatility, at 3.7%. For context, a Canadian government bond portfolio had a long-term annualized volatility of approximately 4.8%.*
When hedged, global bonds tend to offer lower volatility over the long-term
The Bloomberg Global Aggregate Bond Index represents the world's government bond market. This enormous market holds 30,598 bonds for a total market value of nearly US$68 trillion. As shown in the chart below, Canada represents only 3.8% of the debt issued in the global economy. The U.S. and the Eurozone represent the largest components, with a combined value of approximately 65%. Exposure to the vast market available outside of Canada provides greater diversification opportunities.
Canada is only a small share of the global bond market
Uneven economic growth and inflation across countries and regions present opportunities for global bond investors. Working in a global bond universe and understanding the global monetary policy landscape both enable active bond managers to take advantage of investment opportunities that can provide downside protection with the potential for some capital appreciation.
Taking advantage of global bond markets can be a strategy that helps reduce risk and enhance return potential. Global bonds not only provide diversification opportunities, but can also offer a wider range of potential returns than Canadian bonds, helping you meet your long-term investment goals.