Winning the Duration Battle With Global Bond ETFs

A 19% decline this year for 10-year Treasury yields has been a boon for longer-dated bonds and the relevant exchange traded funds.

Still, speculation that the Federal Reserve is bound to raise interest rates at some point next year has sent investors flocking to short duration bond funds. Most of the interest has been in low duration domestic offerings, but investors can also consider adding some international exposure to their lower duration bond holdings.

“The year-over-year percent change in the US consumer price index (CPI) is presently 1.7 percent, scarcely 0.6 percentage points higher than its cyclical 1980s low of 1.1 percent, when the monetary authorities of mature economies on both sides of the Atlantic first confronted and then triumphed in subduing the menace of chronic double-digit price pressures,” said S&P Capital IQ in a recent research note.

There has been ample talk this year of the Bank of England being the second major developed market central bank after the Reserve Bank of New Zealand to raise interest rates, but BoE has not made that move yet. That has pressured the pound. [Dollar’s Rise Crimps These ETFs]

“Mixed signals as to when the Fed and BoE should commence monetary policy normalization and by how much they need to increase their bellwether lending rates will proceed to fuel debt market confusion and suspicion about the precise intentions of both monetary authorities. True, both central banks are committed to a reversal of quantitative credit relaxation, but persistent concerns about slack labor market conditions and weak nominal wage gains are discouraging Chair Janet Yellen and Governor Mark Carney from acting too hastily to lift policy rates,” said S&P Capital IQ.

The Vanguard Total International Bond ETF (NYSEArca: BNDX) is one ETF investors can use for international bond exposure without having to worry about the impact of currency fluctuations because BNDX is a currency hedged ETF.

BNDX tries to reflect the performance of the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index, which includes government, agency, corporate and securitized non-U.S. investment-grade fixed income investments issued in foreign currencies but also includes a hedge to its currency exposure.

BNDX has an average duration of seven years and charges 0.2% per year, making it less expensive than 81% of comparable funds, according to Vanguard. S&P Capital IQ rates BNDX marketweight. The ETF’s top three country weights are Japan, France and Germany, which combine for 44% of the fund’s weight. [Core Bond Building Blocks]