As Investors Exit Treasuries, Get International Bond Exposure

Rising bond yields are certainly racking the stock market thus far in the second quarter, but for those who are also bullish Treasury investors, it adds an additional headache. As such, it appears investors are heading for the exits on U.S. Treasuries and towards the entranceway of international and European bonds.

“Big investors are selling US Treasuries and buying European government bonds, betting that cooler inflation in Europe will allow its central bank to start cutting interest rates sooner than the Federal Reserve,” the Financial Times reported, noting that big money managers like Pimco, JPMorgan Asset Management, and T Rowe Price are adding to their positions in European bonds.

As the FT article mentioned, one of the reasons could be that the path towards rate cuts could be more definitive. The U.S. Federal Reserve has certainly been more measured in their approach to rate cuts, opting to keep rates steady and absorb more economic data prior to making a decision.

As for the European Central Bank (ECB), it seems the aforementioned money managers expect that rate cuts are more likely to happen. The article added that there’s been a divergence in economies  between the U.S. and Europe with the latter experiencing softer inflation while the former is still seeing its economy still running hot. Of course, it gives the Fed pause on cutting rates just yet, continually feeding into the higher-for-longer interest rates narrative.

“The path for rate cuts in Europe is clearer than in the US,” said Bob Michele, chief investment officer and global head of fixed income at JPMorgan Asset Management. “It is hard to find an economic reason for the Fed to cut rates.”

2 International Bond Options to Ponder

With 57.20% of holdings in European debt, fixed income investors who want to diversify their bond portfolios that are already dominated by U.S. exposure can opt for the Vanguard Total International Bond Index Fund ETF Shares (BNDX). It offers exposure to strictly international debt sans the U.S.

BNDX 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 3.11% as of April 8. It carries a low expense ratio of 0.07%.

Those who want to retain exposure to U.S. Treasuries, can do so with the Vanguard Total World Bond ETF (BNDW). The fund seeks to track the performance of the Bloomberg Global Aggregate Float Adjusted Composite Index. That index measures the investment return of investment-grade U.S. bonds and investment-grade non-U.S.-dollar-denominated bonds. The ETF has a low expense ratio of just 0.05%.

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