The Perils of Passive with Global Bonds

April 4, 2017

2 minute read

The Perils of Passive with Global Bonds

by Erin Bigley, Fixed Income, AllianceBernstein

Rising US interest rates has many investors looking for ways to diversify outside of the US curve. And one natural way to do that is to look internationally. Think more globally about your bond portfolio.

Now that comes with quite a few benefits but also challenges in terms of managing return and risk. The key when you’re investing globally is to give yourself choice—and to able to be choosy, you can’t be passive.

If you take, as a case in point, Asia: In the Asia-Pacific region, you have two contrasts in Japan and Australia. Japan makes up about 20% of the global bond universe. Yet its bonds yield about zero out into the ten-year maturity area. Contrast that with Australia, where yields are about 2% higher at nearly every point along the curve, yet it makes up 1% of the global bond universe.

If you invest passively, you’re getting a significant exposure to Japan, a very small exposure to Australia—might not be the optimal mix in terms of return. When you think about the risk side, Europe presents an interesting case in point.

There’s a lot of political risk right now, particularly in the lead up to the French election in late April, early May. France makes up roughly 6% of the global bond universe. That may not be the optimal weighting in your portfolio, given how political risks are evolving and how they might be priced in the market.

So at the end of the day, when it comes to investing globally, you’ve gotta be choosy. You’ve gotta have the flexibility to actively manage your exposures to take advantage of return opportunities and manage the downside risk.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.