U.S. fixed income investors with a home bias are confronted with two major challenges:

 

  1. Continued low yields resulting from historically low interest rates in the United States.
  2. 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. 

 

Exhibit 1: The Yields Are Out There -- OppenheimerFunds

 

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.

 

Exhibit 2: Non-U.S. Bonds Have Exhibited Low Correlation to Their U.S. Peers -- OppenheimerFunds

 

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.

 

Exhibit 3: Currency Strength Tends to Be Cyclical -- OppenheimerFunds

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.

Follow @OppFunds for more news and commentary.

Brochure The Case for International Debt: Exploring
Income Opportunities Outside the U.S.

 
  1. ^Duration measures interest rate sensitivity. The longer the duration, the greater the expected volatility as interest rates change.
  2. ^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.
  3. ^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.