Portfolio perspectives
Expert Perspective
|March 16, 2026
Portfolio perspectives
Each month, you’ll have access to the latest insights from our Portfolio Solutions experts to help you address evolving issues that may affect your clients’ portfolios. In this edition:
- International bonds may strengthen fixed income portfolios by adding another source of return and reducing sensitivity to U.S. interest rate movements.
- Advisors may want to review benchmarks and asset location to ensure portfolios properly reflect—and benefit from—international bond exposure.
Strengthening fixed income portfolios with international bonds
Over the past year, international fixed income has been consistently coming up in conversations with advisors. Often, the advisor doesn’t have a dedicated exposure to international bonds (our analysis of over 2,000 advisor portfolios reveals that roughly one in five have a dedicated position). Many are interested in investing and are looking for guidance on two of the most important considerations for a fixed income portfolio: yield and duration. These concepts can sometimes be challenging to assess, especially with currency-hedged bonds.
Hedging adds a new return component
We typically favor hedging foreign bonds back to USD because it has historically helped reduce volatility, often what you want in fixed income. With domestic bonds, returns come from price changes and income. But a hedged international bond fund includes a third source of return known as the “hedge return.” This return—positive or negative—comes from the currency swap or forward contract used to neutralize foreign currency exposure.
Hedge returns are largely driven by short-term interest-rate differentials between the U.S. and foreign markets. Figure 1 shows the annualized returns of foreign bonds in their local currencies along with the hedge returns from 2007 to 2025.1 Because U.S. front-end rates were generally higher than those of other developed countries, currency hedging contributed positively to returns. These front-end rates reflect central bank policy targets, and the favorable rate differential between the Federal Reserve and other developed market central banks led to a positive hedging return for U.S. investors. This dynamic also highlights why headline yields on hedged international bonds may not fully capture their total return potential.
Figure 1: Hedge returns are a material component of international bond performance
Annualized returns of local bonds and currency hedging
Source: Vanguard Investment Advisory Research Center calculations using data from Bloomberg, Morningstar, and FactSet. Data as of December 31, 2025.
Notes: Annualized hedge returns calculated using month-end currency spot rates and 1-month currency forward rates. Annualized local bond returns are each bond market’s total return in their local currencies. Euro zone: currency hedge as represented by the spot EUR/USD rate and EURUSD 1-month currency forward, local bonds as represented by Bloomberg Euro Aggregate Bond Index (in EUR). Japan: currency hedge as represented by the spot JPY/USD rate and JPYUSD 1-month currency forward, local bonds as represented by Bloomberg Japanese Aggregate Bond Index (in JPY). Switzerland: currency hedge as represented by the spot CHF/USD rate and CHFUSD 1-month currency forward, local bonds as represented by FTSE Swiss Government Bond Index (in CHF). Data covers the period from December 31, 2007, through December 31, 2025.
Hedged international bonds have had less sensitivity to U.S. interest rates
Duration is another area where advisors often look for guidance, particularly when choosing between short, intermediate, and long positions in international bonds. This decision is more complex than with domestic bonds, which are shaped by a single yield curve and allow for relatively straightforward interest rate risk adjustments. International bonds, by contrast, are tied to multiple yield curves, each influenced by their own inflation outlook, monetary policy, and economic conditions.
Because these yield curves don’t move in lockstep, shifts in one market can offset changes in another, reducing the portfolio’s sensitivity to any single rate move. For example, rates may rise in Japan and fall in the euro zone, potentially neutralizing some duration risk. Figure 2 illustrates this, showing how duration and changes in five-year U.S. Treasury yields explain about 80% of price returns in U.S. bonds but only roughly half as much in global ex‑USD bonds. This is because yield curve movements are less than perfectly correlated across the different regions in a globally diversified fixed income portfolio.
Figure 2: Treasury curve movement explains much more of U.S. bond returns than international bond returns
Actual monthly returns versus duration-implied returns.
Source: Vanguard Investment Advisory Research Center calculations using data from Saint Louis Federal Reserve Database and Bloomberg. Data as of December 31, 2025.
Notes: U.S. Bonds are represented by the Bloomberg U.S. Aggregate Bond Index. Global ex-USD bonds are represented by the Bloomberg Global Aggregate ex USD Index (USD Hedged). Inferred monthly returns are calculated using the change in five-year constant maturity U.S. Treasury securities yields and the duration of U.S. and Global ex-USD Bonds, respectively. Data covers the period from January 31, 1990, through December 31, 2025.
Implementation considerations
International bonds can enhance client portfolios, but they also introduce a few practice‑management considerations. Advisors benchmarking to the U.S. Aggregate Bond Index may need to adopt a more global benchmark or clearly explain to clients why performance may differ when international exposure is included. Advisors should also consider asset location to help optimize after‑tax returns.
Bottom line
International bonds require additional understanding, but they can offer comparable returns to domestic bonds with lower volatility and less-than-perfect correlations, making them a valuable complement to a portfolio.
Advisors interested in adding international exposure can explore our Total International Bond ETF (BNDX), which offers broad, USD‑hedged exposure to foreign bonds. Our suite of core active fixed income ETFs— Core Bond ETF (VCRB), Core-Plus Bond ETF (VPLS), and Multi-Sector Income Bond ETF (VGMS)—also tend to offer 15–25% exposure to international bonds.
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1 Returns are for illustrative purposes only as they do not represent the performance of any investment. Returns also do not include any costs or fees that may arise from implementing the currency hedge. Past performance is no guarantee of future returns.
More Vanguard analysis
For additional expert insights, check out:
- Advisor Trends: Find out how your portfolios stack up in comparison with your advisor peers’.
- Market perspectives: Turn to Vanguard's senior economists each month for projected returns and monthly economic highlights on inflation, growth, and expected Fed actions.
- Active Fixed Income Perspectives: View our quarterly, in-depth commentary for a sector-by-sector analysis and a summary of how those views affect the Vanguard active bond funds.
- ETF Industry Perspectives: Get the latest ETF trends and insights from our investment experts to help you address issues that may affect your clients' portfolios.
Notes:
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- Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.
- 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.
- The Vanguard Total International Bond ETF is subject to currency hedging risk, which is the chance that currency hedging transactions may not perfectly offset the fund's foreign currency exposures and may eliminate any chance for a fund to benefit from favorable fluctuations in relevant currency exchange rates. The Fund will incur expenses to hedge its currency exposures.
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