Global Equities Rally Could Spill Over Into International Bonds

Thanks to artificial intelligence (AI) and investors still holding out hope that rate cuts will happen at some point, global equities are marching higher. That rally could eventually spill over into other assets like international bonds.

A closer look, however, reveals that economic data is also supporting the market optimism. Global investment firm Goldman Sachs cites increased global manufacturing activity as a positive sign that world economies are exhibiting strong growth.

“Goldman Sachs upgraded its rating on global equities to ‘overweight’ on prospects of economic growth and recovery in manufacturing activity, after starting the year with a ‘neutral’ rating across assets,” a Reuters report said, noting that there are also signs of improvement in the United States and that capital markets will continue reading into the economic data to determine when rate cuts will finally happen.

Loosening monetary policy could also help bring down yields and thus push bond prices higher. Equities and bonds could both rally, which will help the latter, as increased demand will help consume the supply from record debt issuance this year.

International bonds can also help diversify a fixed income portfolio and open other avenues for yield. A discerning bond investor who wants only international bond exposure without U.S. debt can opt for the Vanguard Total International Bond Index Fund ETF Shares (BNDX).

It seeks to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index. Its portfolio is primarily investment-grade debt, so credit risk is minimized. Furthermore, the fund’s 30-day SEC yield is 3.07% as of February 22, and it carries a low expense ratio of 0.07%.

A Global Bond Option

Bond investors who want to retain exposure to U.S. debt should take a look at the Vanguard Total World Bond ETF (BNDW). With its low 0.05% expense ratio, the fund seeks to track the performance of the Bloomberg Global Aggregate Float Adjusted Composite Index, which measures the investment return of investment-grade U.S. bonds and investment-grade non-U.S.-dollar-denominated bonds.

As mentioned, BNDW can be ideal for investors who want exposure to international debt markets but do not want to disregard the U.S. bond market completely, like BNDX. In essence, the ETF provides more of a global aggregate bond fund.

BNDW uses a fund-of-funds structure that holds the aforementioned BNDX as well as the Vanguard Total Bond Market Index Fund ETF Shares (BND) to get its global bond exposure. Also as of February 22, the fund has a 30-day SEC yield of 3.78%.

For more news, information, and strategy, visit the Fixed Income Channel.