Should you only choose domestic bonds?

[Tastebuds]

Domestic bonds are supposed to provide protection for the liabilities one has in the country and economy where you live.
Non-EUR bonds might expose one to risks outside of the home country/ home currency.

Do you think that one should only hold Euro fixed income in the bond part of the portfolio?

 

[Sarenco]

Do you think that one should only hold Euro fixed income in the bond part of the portfolio?

Yes, take your currency risk on the equity side.

As things currently stand, I would stick with deposits and/or State savings products for the fixed income element of any investment portfolio outside of a tax-advantaged pension fund.

 

[Gordon Gekko]

I was at a presentation by Kevin McConnell recently, where he described fixed income/bonds as "a dead asset class". I would agree. Use cash and State Savings to provide the ballast in your portfolio. Western government debt just cannot deliver anything for the forseeable future. My worry is that investors will be pushed towards lower quality debt, leading to some form of shock down the line.

 

[Marc]

The optimum portfolio invests in global bonds hedged back to the domestic currency.

Year to date for example the vanguard global bond fund euro hedged is up 5.56%. I'll take that thank you very much.

Whereas the real return on Euribor deflated for Harmonised EU inflation has been negative 0.2%pa between 2008 and the end of last year.

Sensible cash deposits (ie where you hope to get your money back again) have provided savers with negative real returns.

 

[Sarenco]

Year to date for example the vanguard global bond fund euro hedged is up 5.56%. I'll take that thank you very much.

I'm really not sure what the performance of any asset class over any six-month period proves. In any event, the Vanguard Euro Government Bond Index Fund is up 5.25% YTD.

Surely you have to look at this issue at a wider portfolio level? If an investor holds an equity portfolio that is genuinely diversified on a global basis, then the vast majority of their holdings will be denominated in currencies other than Euro. In those circumstances, it makes sense to me for a Eurozone investor to maintain the "safe" portion of their portfolio in Euro denominated instruments.

Whereas the real return on Euribor deflated for Harmonised EU inflation has been negative 0.2%pa between 2008 and the end of last year.

I thought we were discussing the wisdom of holding fixed income investments denominated in currencies other than an investor's home currency? I'm not sure I understand what EURIBOR or the HICP has to do with that discussion.

Sensible cash deposits (ie where you hope to get your money back again) have provided savers with negative real returns.

Really?

Rabo (arguably the safest retail bank on the planet) currently pays Irish depositors 0.6% on instant access deposits up to €50k - and deposits up to €100k per person are guaranteed by the government of one of the highest rated countries on the planet. Inflation in Ireland (CPI) is currently zero so that's hardly a negative real return. More importantly, a depositor doesn't have to pay any commissions, fees or other investment costs to get that rate and DIRT is lower than the marginal tax rate of many depositors.

 

[Dan Murray]

The optimum portfolio invests in global bonds ....

I get nervous about absolute statements like this given that there are so many options and unknowns.

I agree completely with Sarenco that quoting the last 6 months performance is extremely inappropriate. One needs far longer periods in order for any inferences to become meaningful. Even when performance figures are viewed over more sensible periods, an understanding of the risks and drivers of that (historic) performance is of critical importance. For example, one could quote very strong returns over various periods in respect of long dated European Bond funds - all of which would simply serve to belie the risks alluded to by Gordon Gekko above.

Do you think that one should only hold Euro fixed income in the bond part of the portfolio?

I also believe that it's generally not at all a good idea to proffer investment advice without a proper sense of the financial situation and objectives of the person seeking advice.

If you provide a little more info on your financial situation/objectives, I'd say you'll receive some helpful commentary. In particular, what is the purpose of your bond holding? Is your "portfolio" pension related in some way? Have you given consideration to the "duration" (the short v. long dated range) and "quality" (the high grade sovereign v. investment grade corporate range) of the bond holding? What is your investment time horizon, etc?

 

[Gordon Gekko]

Maybe I'm a simple soul, but if an instrument (such as a 10 year bond) pays one percent a year, redeems at par, and has increased in value by 7%, surely its future isn't particularly rosy?

As Eamon Dunphy would say, I wouldn't back fixed income with your money...

 

[PMU]

Domestic bonds are supposed to provide protection for the liabilities one has in the country and economy where you live.
Non-EUR bonds might expose one to risks outside of the home country/ home currency.

If you buy a bond denominated in a non-euro currency, as you point out, you are taking the risk that future exchange rate fluctuations will make it worth more or less in euro than an equivalent euro-denominated bond. Theoretically, in an efficient market, exchange rate changes should offset any difference in the interest rates on two equivalent debt investments (e.g. a ten-year euro government bond and a ten-year sterling-denominated UK government bond). But, as far as I am aware, the real world does not appear to be this efficient, so you may earn extra returns (or suffer losses) because of exchange rate changes. So you would want to be compensated for the risk of holding non-euro denominated bonds. And if you are not certain you are being so compensated, why would you hold non-euro denominated bonds?

 

[Protocol]

As a point of interest, note that the entire Swiss Govt bond yield curve is now negative, even the 30yr and 50yr debt.

 

[galway_blow_in]

Domestic bonds are supposed to provide protection for the liabilities one has in the country and economy where you live.
Non-EUR bonds might expose one to risks outside of the home country/ home currency.

Do you think that one should only hold Euro fixed income in the bond part of the portfolio?

i started a thread over a year ago asking why u.s treasuries were so cheap , they have risen about 15% since then , emerging market debt appears to be good value right now too

 

[Marc]

Mark Twain said;"what gets us into trouble isn't what we don't know. It's what we know for sure that just ain't so"

Keynes said" markets can remain irrational longer that you can remain solvent."

It cost Bill Gross his career at Pimco. He repeatedly stated that yields couldn't go any lower.

About a week ago 10 year bunds were yielding minus 0.168.

So global bonds hedged to euros have provided investors with positive returns at a time when many people expected to lose money.

Vanguard's adviser alpha survey estimates that a competent adviser adds around 3%pa to the return that a DIY investor achieves but we rarely get the opportunity to test this hypothesis directly.

This is a good case study because we can compare two actual positions.

A quick calc tells me
1) ignore the DIRT argument since exit tax is at the same rate of 41%
2) so we are comparing 0.354% net of dirt with 3.28% net of exit tax and fund fees.

So the realised (ex post) alpha in just the first 6 months of this year was equivalent to 9 years bank interest.

It's at times like this that working with a good adviser really pays off

 

[Tastebuds]

Thanks to you all for your insightful comments

If you provide a little more info on your financial situation/objectives, I'd say you'll receive some helpful commentary. In particular, what is the purpose of your bond holding? Is your "portfolio" pension related in some way? Have you given consideration to the "duration" (the short v. long dated range) and "quality" (the high grade sovereign v. investment grade corporate range) of the bond holding? What is your investment time horizon, etc?

OK, a little more info as follows:

• Investment horizon: 25 years. So, it is a retirement related goal
• The purpose of the bond part: holding a safe part in my portfolio, and take the risk on the equity side
• I have 2 sources of money to achieve this:
  • PRSA: monthly salary deductions
  • A USD account: my savings are in USD

Because my savings are in USD and EU based ETFs have a very punitive tax structure, I am going to invest my USDs in US domiciled ETFs on a 70 equity -30 bonds strategy.

IF I take my whole portfolio as a whole I have 2 options to achieve that:

• option1: to customise my PRSA account to be heavily invested on EURO bonds, and use my USD cash to cover the equity part
• option2: to follow the 70-30 strategy on both the PRSA and US ETF funds. In this case:
  • the US domiciled Bond ETFs won´t be EURO only, but more USD/US economy biasied
  • Easier to rebalance
  • I could use a default PRSA strategy without any need to customise it

That was the context of my question. Option 2 is easier but it would expose me to risks related to the US economy/USD

Another point I was thinking of is whether equity that you hold for more than 20 years is more safe than bonds, and also what has been mentioned in this thread or whether there is value in bonds at the moment compared to cash/deposits..

Thanks again

 

[PMU]

Investment horizon: 25 years.

If you have a very long investment horizon just forget about bonds, unless you need income. Risk attenuates over time, so stick to equities (i.e. domestic; foreign and emerging markets) and also obtain some returns from other, i.e. diversified, asset classes (e.g. property, commodities, timber, absolute return funds, etc.) that are not fully correlated with equities.

 

[Tastebuds]

If you have a very long investment horizon just forget about bonds, unless you need income. Risk attenuates over time, so stick to equities (i.e. domestic; foreign and emerging markets) and also obtain some returns from other, i.e. diversified, asset classes (e.g. property, commodities, timber, absolute return funds, etc.) that are not fully correlated with equities.

Yes, I agree...
Also, Burton Malkiel believes that in an era of financial depression the standard bond recommendation should be adapted and substituted by other products like dividend growth stocks

From A Random Walk Down Wall Street
“EXERCISE 7A: USE BOND SUBSTITUTES FOR PART OF THE AGGREGATE BOND PORTFOLIO DURING ERAS OF FINANCIAL REPRESSION
...One technique to deal with the problem (of low bond yields) is to use an equity dividend substitution strategy for some portion of what in normal times would have been a bond portfolio. ...I recommend such a partial substitution of stocks for bonds in that part of the portfolio designed for lower risk and more stability.”

He also suggests using Corporate Bonds or EM bonds as standard bond substitutes...

Do you know any Corporate Bonds or dividend growth stocks more Europe-EUR focused that can be purchased via US domiciled ETFs?
Similar to Vanguard Intermediate-Term Corporate Bond ETF (VCIT) and Vanguard Dividend Appreciation ETF (VIG)... but less US focused

Thanks

 

[Tastebuds]

Do you know any Corporate Bonds or dividend growth stocks more Europe-EUR focused that can be purchased via US domiciled ETFs?
Similar to Vanguard Intermediate-Term Corporate Bond ETF (VCIT) and Vanguard Dividend Appreciation ETF (VIG)... but less US focused

Just found out that vanguard has VIGI , which is the international version of VIG