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Hedging the USD with non-USD Bonds

https://www.marketwatch.com/story/the-dollar-is-going-to-fall-very-very-sharply-warns-prominent-yale...

The above article makes sense. Should we be hedging against USD devaluation in our FI allocation?

We use VTWNX (Vanguard Target Retirement 2020) as a model / guide for our retirement portfolio.

VTWNX is 50/50. Its FI allocation holds 25% USD Hedged non-USD Bonds.

Since these bonds yield less, have lower credit scores, and have a cost to hedge (0.15%) back to USD we never bothered. 

But as a hedge against USD devaluation they seem like a very good idea.

Our FI = 30% TIPS + 30% US Treas + 30% Corps + 10% CASH

Maybe = 20% TIPS + 70% World Bonds (e.g. BNDW) + 10% CASH??

 

 

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Re: Hedging the USD with non-USD Bonds

BNDW has only 351 million in assets.  That could cause problems if you want to sell in a down market as well as other  issues such as bid/ask spread.

Also very smart individuals like Stephen Roach are often correct in their predictions, but their time frame is often wrong; what they foresee takes several years to actually transpire, if ever.

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Re: Hedging the USD with non-USD Bonds

I have a very small portion of my portfolio in foreign (unhedged) investment grade corporate bonds.  IBND and a smaller amount in international TIPS (WIP).  My global bond fund does some currency bets (PZTRX), but I've been a little displeased with it lately. 

I'm not convinced this is necessary and I read a good article on it recently that unfortunately I can't find--but basically it recommended unhedged foreign equities and hedged bonds.  Why?  Because currency fluctuations are too volatile and a foreign currency crash can destroy bonds long-term due to lower expected returns.  Equities, on the other hand, have the chance to still grow beyond the currency fluctuation.

My reason for "testing" this unhedged bond exposure was simply tactical, and I did it back in March when the dollar was meeting its goal as the world's reserve currency.  I figured dollar had to go down and didn't want to risk both interest rates in gov bonds + extreme equity risk.  Dollar has fallen a bit since and IBND at least has ticked up--although improving credit conditions could have helped as well.  But, with its yield so low I could see where it could easily get smoked.  Unsure I'll keep this long term, but it might be a fund I just continually add a little money to here and there when the dollar is strong.  

At the end of the day, there are only so many risks we can "hedge" against and I'm coming to believe that the capital required to meaningfully hedge results in a portfolio full of "hedges" and not much else.

 

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Re: Hedging the USD with non-USD Bonds


@galeno wrote:

https://www.marketwatch.com/story/the-dollar-is-going-to-fall-very-very-sharply-warns-prominent-yale...

The above article makes sense. Should we be hedging against USD devaluation in our FI allocation?

We use VTWNX (Vanguard Target Retirement 2020) as a model / guide for our retirement portfolio.

VTWNX is 50/50. Its FI allocation holds 25% USD Hedged non-USD Bonds.

Since these bonds yield less, have lower credit scores, and have a cost to hedge (0.15%) back to USD we never bothered. 

But as a hedge against USD devaluation they seem like a very good idea.

Our FI = 30% TIPS + 30% US Treas + 30% Corps + 10% CASH

Maybe = 20% TIPS + 70% World Bonds (e.g. BNDW) + 10% CASH??

 

 


Never, ever do anything based on predictions.  Below are several predictions by "experts".

1) Interest rates can only go up by many "experts".

2) The 10 year treasury rate will be at 6% (link) by Gundluch, the bond "king".

3) EM stocks must outperform US stock this year for years now.

4) GMO forecasted years ago what stocks will do in the next several years and were so wrong.

5) Arnott another "expert" was wrong and his model fund PAUIX had below-average performance.  PAUIX ranks at 75 and up for 1-3-5-10-15 years.

6) Bogle forecasts were off

7) PE, PE10, inverted yield are off by years.

8) Value investing must be good this year for years and it still lags, after all, growth has been better for so long.

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Participant ○○○

Re: Hedging the USD with non-USD Bonds

Thanks guys.

I'm trying to find a good reason why the Vanguard Target Tetirement funds hold 25 non-USD bonds in the FI allocation.

The only good reason is to hedge against USD devaluation.

I also had the idea of shortening our FI duration to hedge against rising interest rates. But when I saw how much REAL yield we would lose to hedge an unlikely POSSIBLE interest rate hike I came to my senses.

Same situation with the non-USD bonds. Loss of REAL money to hedge against an unlikely possibility.

 

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