U.S. fixed income investors with a home bias are confronted with two major challenges:
- Continued low yields resulting from historically low interest rates in the United States.
The risk of rising interest rates as the Federal Reserve seeks to keep the U.S. economy growing at a sustainable rate.
But even in this environment, we believe there is a way for investors to meet their fixed income needs.
International bonds, which consist of government and corporate debt from both developed and emerging markets, may offer attractive yields relative to the United States and are typically less sensitive to changes in U.S. interest rates (i.e., they have lower U.S. duration risk).1
They may even provide attractive diversification properties to a portfolio through exposure to more than 50 countries, each with its own economic policy. In addition, international bonds offer further potential returns in the form of foreign currency exchange rates.
The Potential Benefits of International Bonds
1. More Opportunities for Yield
International government bonds may offer higher yields and thus the potential to provide a “yield cushion” above inflation when compared to U.S. bonds. Additional yield and geographic diversification might even reduce the sensitivity that international bonds have to changes in U.S. interest rates.
2. Enhanced Portfolio Diversification
Historically, international bonds have maintained a low correlation2 to traditional U.S. fixed income, while having provided additional return opportunities stemming from non-U.S. interest rates and the credit cycles of specific countries.
3. Additional Return Drivers
Additional return drivers, such as those from active currency management, offer opportunities to enhance total returns from short-term carry3 and capital gains from fluctuations against the U.S. dollar.
The Limits of U.S. Fixed Income and Global Bonds
Many U.S. fixed income investors tend to invest with a significant home bias, with a focus on domestic investment-grade bonds. Doing so, in our view, vastly limits the opportunity set while closely linking performance to the interest rate, economic and credit cycle of the United States.
On the other hand, some U.S. investors may prefer to pursue global strategies to gain international fixed income exposure. However, many global debt funds have high concentrations in the U.S., primarily offering only investment-grade, developed market exposure. We believe this limits opportunities and fails to diversify away from U.S. interest rate risk.
Why Oppenheimer International Bond Fund
We look to provide investors with concentrated exposure to international markets and a genuine source of diversification by not investing in U.S. issuers. We maintain exposure to roughly 55-80 countries and diverse sectors (government and corporate) across the credit spectrum.
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- ^ Duration measures interest rate sensitivity. The longer the duration, the greater the expected volatility as interest rates change.
- ^ Correlation expresses the strength of relationship between distribution of returns between two data series. Correlation is always between +1 and –1, with a correlation of +1 expressing a perfect correlation, meaning that the two series being compared behave exactly the same, a correlation of –1 meaning the two series behave exactly opposite and a correlation of zero meaning movements between the two series are random.
- ^ Carry is defined as the profit investors gain from selling a certain currency with a relatively low interest rate and using the funds to purchase a different currency yielding a higher interest rate.
OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.
Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value.
Special Risks: Fixed income investing entails credit and interest rate risks. Interest rate risk is the risk that rising interest rates or an expectation of rising interest rates in the near future, will cause the values of the Fund’s investments to decline. Risks associated with rising interest rates are heightened given that rates in the U.S. are at or near historic lows. When interest rates rise, bond prices generally fall, and the Fund’s share prices can fall. Below‑investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk.
Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Emerging and developing market investments may be especially volatile. Eurozone investments may be subject to volatility and liquidity issues.
Derivative instruments entail higher volatility and risk of loss compared to traditional stock or bond investments. Currency derivative investments may be volatile and involve significant risks. Small and mid-sized company stock is typically more volatile than that of larger company stock. It may take a substantial period of time to realize a gain on an investment in a small or mid-sized company, if any gain is realized at all.
The Fund is classified as a “non-diversified” fund and may invest a greater portion of its assets in the securities of a single issuer. Regulation S securities are privately offered securities, may be illiquid, and involve a high degree of risk which may result in substantial losses to the Fund. The Fund may also invest through a wholly-owned Cayman Islands subsidiary, which involves the risk that changes to the laws of the Cayman Islands could negatively affect the Fund. Diversification does not guarantee profit or protect against loss.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of U.S dollar-denominated, investment-grade U.S. corporate government and mortgage‑backed securities. The Citigroup Non-U.S. World Government Bond Index is an index of fixed rate government bonds with a maturity of one year or longer and amounts outstanding of at least U.S. $25 million. J.P. Morgan Government Bond Index—Emerging Markets Global Diversified is a comprehensive, global local Emerging Markets Index, and consists of regularly traded, liquid fixed-rate, domestic currency government bonds to which international investors can gain exposure. J.P. Morgan Emerging Markets Bond Index Global Diversified is a composite index representing an unleveraged investment in emerging market bonds that is broadly based across the spectrum of emerging market bonds and includes reinvestment of income (to represent real assets).
The Bloomberg Barclays U.S. Government 1–3 Year Bond Index is composed of treasury bond and agency bond indices that have maturities of one to three years. The Bloomberg Barclays U.S. Aggregate Bond (1–3 year) Index is a component of the Bloomberg Barclays U.S. Aggregate Bond Index, an index of U.S.-dollar-denominated, investment‑grade U.S. corporate government and mortgage‑backed securities that have maturities of one to three years. The Bloomberg Barclays U.S. Aggregate Bond (7–10 year) Index is a component of the Bloomberg Barclays U.S. Aggregate Bond Index, an index of U.S.-dollar-denominated, investment‑grade U.S. corporate government and mortgage‑backed securities that have maturities of seven to ten years. The Credit Suisse Leveraged Loan Index is a composite index of U.S.-dollar-denominated senior loan returns representing an unleveraged investment in senior loans that is broadly based across the spectrum of senior floating rate loans and includes reinvestment of income (to represent real assets). The Credit Suisse High Yield Index is designed to mirror the investable universe of the U.S.-dollar-denominated high yield debt market. The indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of the Fund or any particular investment.
Past performance does not guarantee future results.
The mention of specific countries, currencies, securities or sectors does not constitute a recommendation on behalf of the Fund or OppenheimerFunds, Inc.
These views represent the opinions of the Portfolio Managers at OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.