Global bonds: An opportune investment
Global bonds are a unique opportunity class that can produce superior returns and provide diverse sources of alpha for a purely domestic bond portfolio. We believe an allocation to global bonds provides domestic portfolios with complementary sources of return by investing in multiple country yield curves, as well as prudent currency management.
Active global bond investors, therefore, have an intrinsic advantage due to an expanded opportunity set. Investors who focus on government bonds in a single country are limited largely to binary duration decisions, while global managers who have the skill to manage country rotations can capture much more complex relationships. In allowing managers to invest globally, investors diversify their source of return and, in our view, allow greater potential for outperformance.
A decade after the financial crisis, global bond markets present a compelling investment opportunity as the major central banks of the developed world begin to unwind unprecedented stimulus and unorthodox monetary policy. In the U.S., the Federal Reserve (Fed) has steadfastly tightened conditions, and now the central banks of other developed economies are poised to normalize.
In this environment, the bond markets of developed nations appear more synchronised and riskier with yields expected to move higher from their artificially low levels. Comparatively, the broader G20 and emerging markets have seldom been more appealing from a risk-reward perspective. Many of these countries are undergoing broad-based fiscal reform, expanding upon infrastructure, diversifying their economies away from a heavy reliance upon manufacturing, and increasing domestic demand and consumption. In light of these factors, we think these countries are well-positioned for independent economic growth and prosperity.
An appropriately positioned strategy is critical to success when investing in global bonds. In our view, global fixed income investment portfolios built around indices are less likely to provide strong returns. This is because index weights are directly proportional to the size of a country's debt issuance. Therefore, investors in benchmarked strategies are led to increase holdings in countries with huge debt loads, not huge opportunities. In the current environment, this paradox is truer than ever as private sector borrowing and spending have been replaced by massive government debt issuance and spending in the developed world.
This paper discusses the reasons why investing in global bonds makes sense, what current investment opportunities are present within the asset class, and how even more upside can be captured in the asset class through a well-structured portfolio.