Explore the potential of international bonds

Diversify client portfolios and limit volatility with greater international exposure.

International fixed income in context

Given concerns about a rising U.S. budget deficit, potential declines in the value of the dollar, and ongoing concerns about market volatility, advisors may find it’s the right time to increase client portfolio allocations to international bonds.

Some advisors have stayed away from international bonds because the similar return dynamics weren’t worth the added complexities. But focusing only on returns misses a few important points—most notably volatility. In the past 25 years, diversifying fixed income exposures has generally reduced volatility without detracting from returns.¹

Ready to go global? Here’s why you should

Rebecca Venter, Vanguard senior fixed income product manager, explains why now may be the time to add international fixed income to your client portfolios and how to do it right.

Similar returns with lower volatility?

We believe advisors should place a healthy mix of U.S. and international bonds in client portfolios.  Advisors can frame the idea as a clear opportunity to limit risk without compromising possible returns.

Put another way, the risk to advisors in not considering increasing clients’ exposure to international bonds is that your clients may take on more U.S.-related risk than may be appropriate. Just like adding more stocks to a portfolio diversifies away the risk of an individual company, adding more countries’ bonds reduces the risk of a single country in a portfolio.

Our research suggests that a modest allocation of around 30% exposure to international bonds can reduce portfolio volatility, though above that level, the volatility-dampening benefits of increasing international fixed income diminish.²

What you avoid and what you get

By increasing allocations to international bonds exposures, advisors can achieve a number of important objectives, including:

• Reducing U.S.-related risk linked to current fiscal policies and political uncertainty.  
• Gaining exposure to different interest-rate and inflation environments, given policy divergences of different global central banks.
• Accessing an array of fixed income markets to possibly include sovereign, corporate, and emerging market bonds that aren’t available to clients invested only in U.S. fixed income.

The importance of currency hedging

Currency hedging is an important strategy to minimize unwanted exposures when investing in fixed income markets. Doing so means client portfolios are exposed only to the credit and duration risks of particular foreign bonds in those portfolios.

Alternatively, if advisors were to allocate client portfolios to unhedged international bonds, they’d be exposing clients to all sorts of difficult-to-predict currency crosses akin to a multitude of asset classes, each with its own dynamic. All these volatile currencies could prove a challenge to evaluating expected returns in your client portfolios.

The investment case for hedging your international bonds is that it has the potential to add value from a risk/return profile perspective. Hedging the currency volatility allows the bonds to deliver bond-like returns with bond-like volatility.

Takeaways

We believe that increasing client portfolio allocations to international bonds is sensible. Our research has shown that the average allocation is around 16%, well below the highlighted 30% allocation that can help dampen volatility without compromising returns. ³

However, we also believe that hedging out currency risks linked to foreign bonds helps to isolate the fixed income characteristics of the underlying bond by mitigating the impact of currency fluctuations.

Ready to help your clients reduce volatility without sacrificing returns?

Contact your Vanguard sales representative today for additional advisor resources and portfolio analysis tools.

1 FactSet, based on Bloomberg indexes, using the U.S. Aggregate Index and Global ex-U.S. (hedged) from December 29, 2000 to June 30, 2025. Volatility measured by standard deviation.

2 Vanguard, as of June 30, 2025.

3 Vanguard and Morningstar, Inc., as of June 30, 2025.

Disclosures

All investing is subject to risk, including possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.

Diversification does not ensure a profit or protect against a loss.

Bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments. Investments in bonds are subject to interest rate, credit, and inflation risk.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issued by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates.

Bloomberg Global Aggregate x USD Index includes government, government agency, corporate, and securitized non-U.S. investment grade fixed-income investments, all issued in currencies other than the U.S. dollar and with maturities of more than one year. Bloomberg U.S. Aggregate Index represents the broadest measure of the taxable U.S. bond market, including most Treasury, agency, corporate, mortgage-backed, asset-backed, and international dollar-denominated issues, all with investment-grade ratings (rated Baa3 or above by Moody’s) and maturities of 1 year or more.