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This article explores how investors can benefit from buying global bonds – particularly those with currency hedging.
  • Since 2011, a portfolio of Canadian dollar-hedged global government bonds has delivered a smoother experience for investors each year than a portfolio of Canadian government bonds.

  • Going back 20 years, a portfolio of Canadian dollar-hedged global government bonds delivered a lower annualized rate of volatility than a portfolio of Canadian government bonds.

  • Exposure to the vast market available outside of Canada provides greater diversification opportunities – and diversification generally lowers risk for investors.

Many investors would think that a global bond portfolio is likely to prove less stable than a Canadian bond portfolio. Surely government bonds issued in other parts of the world could not deliver a smoother ride than those made here in Canada, the thinking goes. But is this true?

The chart below shows that in every year since 2011, a portfolio of Canadian dollar-hedged global government bonds has delivered a smoother experience (less volatility) for investors than a portfolio of Canadian government bonds. The currency-hedged portfolio significantly reduced the impact of market swings – called volatility – over time.

When hedged, global bonds have generally been less volatile

UWhen hedged, global bonds have generally been less volatile

Source: RBC GAM, Morningstar. Three year rolling volatility as of December 31, 2022. Canadian government bonds: FTSE Canada All Government Bond Index, Canadian dollar-hedged global government bonds: FTSE World Government Bond Index (CAD Hedged). Standard deviation is a commonly used measure of risk and is applied to the annual rate of return of an investment to measure the investment’s volatility. Standard deviation shows how much the return on an investment is deviating from expected normal returns. A high standard deviation indicates a greater variability in investment performance

Similarly, over the past 20 years, an unhedged global government bond portfolio had an annualized volatility of 9.4%. But when fully hedged, the portfolio had less than half of the volatility, at 3.4%. For context, a Canadian government bond portfolio had a long-term annualized volatility of approximately 4.5%.*

When hedged, global bonds tend to offer lower volatility over the long-term

When hedged, global bonds tend to offer lower volatility over the long-term

Source: Morningstar Direct as of December 31, 2022, Global Bonds Unhedged: FTSE World Government Bond Index (C$), Global Bonds hedged to CAD: FTSE World Government Bond Index (CAD Hedged)

* Annualized volatility of the Canadian government bond portfolio is represented by the FTSE Canada All Government Bond Index for 20 years ending December 31, 2022.

The FTSE World Government Bond Index (WGBI) represents the world's government bond market. This enormous market holds 1,195 bonds for a total market value of nearly US$23 trillion.1 As shown in the chart below, Canada represents only 4.7% of the debt issued in the global economy. The U.S. and the Eurozone represent the largest components, with a combined value greater than 65%. Exposure to the vast market available outside of Canada provides greater diversification opportunities.

Canada is only a small share of the global bond market

Canada is only a small share of the global bond market

Source: Institute of International Finance as of September 2022. Bond market includes non-financial corporate, financial corporate and government debt. Eurozone includes Austria, Belgium, Finland, France, Germany, Ireland, Italy, Netherlands, and Spain. Other includes Luxembourg. Australia, Switzerland, Sweden, Denmark, Norway, Portugal, Greece, Slovakia, New Zealand, Cyprus, Slovenia, Lithuania, Malta, Estonia, Latvia.

The risk and return potential of different global bond markets can vary significantly from region to region. The chart below shows how widely outcomes can range. Note that Canadian government bonds seldom lead the way. This demonstrates that a diversified, global approach to bonds can help provide greater return opportunities.

Global bonds offer more diversified return potential

Global bonds offer more diversified return potential

Source: FTSE Indices as of December 31, 2022. FTSE WGBI indices for Canada, US, UK, Japan and Eurozone.

Uneven economic growth and inflation across countries and regions present opportunities for global bond investors. Working in a global bond universe and understanding the global monetary policy landscape both enable active bond managers to take advantage of investment opportunities that can provide downside protection with the potential for some capital appreciation.

Taking advantage of global bond markets can be a strategy that helps reduce risk and enhance return potential. Global bonds not only provide diversification opportunities, but can also offer a wider range of potential returns than Canadian bonds, helping you meet your long-term investment goals.

Talk to your advisor to learn the role global bonds play in building a diversified bond portfolio

1 Source: FTSE Russell Factsheet, December 31, 2022

Disclosure

This has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the information. Any investment and economic outlook information contained in this report has been compiled by RBC GAM from various sources. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or omissions. This report may contain forward-looking statements, future performance, strategies or prospects, and possible future action. The words “may,” “could,” “should,” “would,” “suspect,” “outlook,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” “forecast,” “objective” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance. Forward-looking statements involve inherent risks and uncertainties, both about the Fund and general economic factors, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made in relation to the Fund. These factors include, but are not limited to, general economic, political and market factors in Canada, the United States and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological changes, changes in laws and regulations, judicial or regulatory judgments, legal proceedings and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors.


Last updated April 2023