Q&A: Add International Bonds?

Q:

Is there any academic evidence that holding some international bonds (in a high quality international bond fund) would significantly increase return or decrease volatility in that fraction of one's investment portfolio dedicated to bonds?

A:

There is some evidence of benefit from global bond diversification, but it is quite small. Since we believe that investors should own bonds for one reason only; stability, we don't see any compelling reason to go overseas for bonds. Plus, there are numerous potential detriments. Compared with buying short to intermediate-term U.S. government securities (which we espouse), foreign government paper is slightly more difficult to obtain, raising costs.

By far the biggest problem is the added volatility that comes from owning securities denominated in foreign currencies. This can be hedged away, but hedging instruments also increase the costs. We'd rather add diversification and more complexity in those areas where the rewards are likely greater. That's why we suggest global equity diversification and U.S. bond concentration.