What do other diehards do for international bond exposure?

Many years ago, when we first started investing with Vanguard, I sent Mr. Bogle a letter asking: "Why doesn't Vanguard have an international bond fund?"  He sent me a personal reply (I didn't know him then) in which he gave several reasons.  One of these reasons was the unnecessary risk, and another was that bonds are for primarily for safety.   At the time, international money market funds were being touted for their extra high yields.  (A few years later these international money market funds saw severe losses.)

I agree with Mr. Bogle that bonds are primarily for safety.  The credit risk and  currency risk in unhedged bond funds is considerable.  It is  more efficient to seek higher returns in stocks. 

 For the above reasons, I would not bother with an international bond fund even if Vanguard offered one.

 Best wishes.
Taylor

Taylor makes excellent points.  However, recently Bogle has slightly changed his position on foreign bonds as seen in the Rip Van Winkle portfolio in which he suggest 10% foreign bonds.

http://money.cnn.com/2004/02/19/magazines/moneymag/investing_20yearportfolio_0403/index.htm 

IMHO the main reason people are interested in this asset class now is because of the good returns lately which IMHO is not a good reason to invest.  Also it must be stressed that you already have foreign currency exposure in your unhedged stocks.  To my knowledge, all of the Vanguard foreign stock funds are unhedged and hence provide foreign currency exposure.  The choices of good foreign bond funds are not great.  Outside of DFA, you cannot find a short term foreign bond index fund and the only intermediate one I am aware of is the State Street one mentioned above.  So you are basically stuck with high fee actively managed funds on the short side.  Given those ugly facts, and if you feel you HAVE to have exposure,  perhaps look at Prudent Bear Global, PSAFX, or Merk Hard Currency, MERKX for short term bond or currency exposure.  For intermediate exposure I would consider the State Street ETF (BWX) mentioned above.
 

Vgrd#1,

Thanks for the link to Jason Zweig's article about his five funds for the next 20 years.  I noticed that he simply uses "Pimco Foreign Bond" in the first chart of funds.  There are at least a couple of versions available now from PIMCO.  I'm assuming he was referring to the Hedged version, PFOAX / PFODX, because the article is dated Feb.19,2004.  I don't believe the Un-Hedged version, PFUAX / PFBDX, was available then.

Loomis Sayles also has had some success in the Foreign / Global Bond department with LSGLX - Global Bond Fund, and LSBDX - Bond Fund.

Coy

Taylor,

I do want bonds for safety. I'm concerned about the risks of all of the US deficit spending.  Not sure how real that risk is, but it feels like we are beholden to other gov'ts continued purchase of our debt.

Mark 

If you put 10% of your portfolio in foreign bonds, it probably won't make much difference over the next deacade, good or bad.

I think Bill Bernstein said something like, you need four or five asset classes.  Beyond that, you are just amusing yourself.

By the way, I have less than 1% of my portfolio in foreign bonds, just to amuse myself.  It's fun to watch when fantasy basketball season ends.

Petrocelli 

I asked this question at Diehards VI to the expert panel (I asked Bill Bernstein, in particular), so I'll pass on what I've learned. Basically, the response was that this is an expensive and unncessary asset class. This is because you can get foreign currency exposure more efficiently via foreign stocks. There was one more point by Rick Ferri, if I recall correctly. He said that if you use a bond fund like Vanguard Total Bond Index (VBMFX), it already includes some "yankee bonds," which are foreign bonds traded in the U.S. markets. With that said, I still hold small allocation in foreign bonds, just to hedge my currency bets a bit more than just with stocks. As was already mentioned, I prefer the new SPDR Lehman International Treasury Bond ETF (BWX) over the others, but there are still no decent low-cost options. I'm probably in the minority here, but I would prefer a global bond index fund, just like the new global stock index fund that Vanguard plans to launch soon. This would inject some currency diversification so that you aren't stuck with one single currency (high risk, IMO) subject to inflation, etc.

Dan

1James2:

Petrocelli do you play fantasy football?

Yes.  But I have no idea who I am picking after about the 6th round.  Nonetheless, I did pretty well last year, mostly due to a lucky selection of Romo.

In contrast, when I play fantasy basketball, I know exactly who I am picking in even the last round, and I even have reasons for picking him.

Petrocelli

I don't buy bonds for safety.  I buy them because they are generally poorly correlated with equities.  If the equity market takes a serious hit, bonds often go up, but even if they don't, I sell bonds to buy equities.  If I wanted bonds for safety, I  certainly wouldn't be selling them during times of equity market stress.  And yes, when the equity market soars, I buy the bonds that nobody wants.

I invest across the yield curve (short, intermediate and long term) and own both high quality issues and junk.  I own a small position in international junk, but I am not willing to abandon Vanguard in order to buy more.  If Vanguard someday offers an international bond fund of any quality, I will be a buyer.

I won't buy because of some fear that the dollar will go to zero or some play on international politics.  Foreign bonds simply behave a little differently, and they are therefor a diversifier.

Dale G.