Across the Universe

Globalization has been a major trend in the fixed-income markets for the past three decades. Over thirty-five years ago, US Treasuries and US corporate bonds dominated the global fixed-income universe, just as bell bottoms and boom boxes ruled popular culture. But this isn’t 1978, and it’s not all about the US anymore.

Today, despite huge US deficits and massive public debt, US Treasuries represent only about one-quarter of global sovereign debt outstanding. Nearly half of outstanding global corporate credit was issued outside the US in 2015.

However, while the fixed-income markets have become global, investors have been reluctant to invest globally. US investors in particular still show a lot of home-country bias. And the core option for fixed-income investors in most defined contribution (DC) plans remains US-centric.

The time has come to re-examine this bias, as plan sponsors large and small seek ways to help plan participants achieve better outcomes. Over the last 30 years, compelling evidence has accumulated that suggests currency-hedged global bonds have a superior risk/return profile to US bonds, with more potential opportunities to add value.

In this paper, we share the results of our analysis, in which we explain not only why we believe that DC plans should globalize some or all of their fixed-income assets (a compelling historical “up/down capture,” for example, as shown in the display below), but also why they should hedge non-US currency exposure, how to globalize core menus with least disruption to plan participants, and how much of an allocation to global bonds in core menus and target-date funds is appropriate.