Quora Answer: Should You Add International Bonds to Your Portfolio?

The following is my answer to a Quora question: “Should you add international bonds to your portfolio?”

That really depends.  Bonds are used to balance out a portfolio, diversify it and spread risk.  When it comes to international bonds, particularly long-term bonds, you have to consider currency and political risk.  You can mitigate the latter by putting your funds in rated investment grade sovereign bonds or corporate papers. It is difficult to mitigate against the former.  For example, consider how it is from my perspective in Singapore.  20 years ago, the US Dollar to Singapore Dollar was US$1 to S$1.60.  Today, it is US$1 to S$1.30.  I am old enough to remember a time when it was close to US$1 to S$2.  If I put my money in a 30-year Treasury bond, what would I expect the exchange rate to be in 30 years’ time?  Would I earn enough to overcome that exchange rate exposure?  These are major considerations in how I balance my portfolio.

It is an advantage as well as a disadvantage that international bonds are not correlated to the domestic bond market.  It means that a drop in the local bond market does not necessarily mean a drop in my international bond portfolio, which balances it out.  But it also means that a domestic rally would not be a rally across all my debt instrument portfolio.  International bonds are an excellent way to diversify your portfolio, and mitigate from local political risk.  But they should be one component of a balanced, diversified portfolio, not a major part of it.