The inclination that yields will eventually fall as the Federal Reserve loosens monetary policy could have fixed income investors looking overseas in search of more yield. The eurozone, in particular, is starting to see heightened demand for bonds as yield seekers look to lock in rates now before central banks start easing monetary policy.
“Investors have been snapping up the debt of some of the eurozone’s most indebted countries to lock in attractive yields, as the traditional dividing lines between the bloc’s riskier and safer bond markets become increasingly blurred,” reported the Financial Times.
The yield factor is bringing investors back to international bonds, particularly in the eurozone. But credit quality is also improving, making euro bonds a quality-oriented option.
“Traders have been encouraged by declining debt ratios in Italy, Portugal, Greece and Spain, say analysts,” the report said. “That has come on top of a broad rally in eurozone debt late last year on hopes of interest rate cuts, and helped narrow the gap between Italian and German borrowing costs — a key measure of eurozone risks — to 1.56 percentage points, near a two-year low. In October, the gap was more than 2 percentage points.’
An all-encompassing ETF option to get exposure to international bonds is the Vanguard Total International Bond Index Fund ETF Shares (BNDX). It seeks to track the performance of a benchmark index that measures the investment return of non-U.S.-dollar-denominated investment-grade bonds. International bonds can provide a diversification tool for fixed income investors looking to supplement their current core portfolio. Furthermore, the fund’s 30-day SEC yield is 2.97% as of January 24.
Reach for More Bond Yield Overseas
The allure of international bonds also extends to emerging markets (EM), which can offer even greater yield, albeit with more credit risk. As the Federal Reserve pumps the brakes on its rate hiking measures, a retreating dollar could benefit EM assets like bonds.
That said, investors may also want to consider the Vanguard Emerging Markets Government Bond ETF (VWOB). With a low 0.20 expense ratio, the fund is deeply diversified, with almost 700 bond holdings and an average duration of just under seven years.
VWOB seeks to track the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index. The index specifically measures the investment return of U.S.-dollar-denominated bonds issued by governments and government-related issuers in EM countries. For yield seekers, the fund comes with a 30-day SEC yield of 6.81% as of January 24.
For more news, information, and strategy, visit the Fixed Income Channel.