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November 28, 2011 at 07:00 PM
Today, there are more opportunities for individual and institutional investors alike, allowing them to gain access to the global fixed income universe. Investors have the ability to invest in global strategies which may include allocations to specific countries or the combination of multiple regions.
It is said without hesitation that investing within the fixed income arena today is much more complicated than it was over a decade ago. For example, interest rate swaps and cross currency swaps have become common terms and are utilized across most strategies. Rewind the clock just five years and the landscape has changed tremendously. The argument can be made that fixed income investing is always changing and evolving. A primary force behind the change is that global market interdependence has increased. U.S. investors are not only challenged with analyzing and fully understanding the intricacies of a single market and the impact of the central bank’s actions on the broader market. Today, a strong understanding of the central banks of our global neighbors and the interaction between all parties is needed. This is evident with the ongoing European sovereign debt crisis and the way government policy not only effects local markets, but markets abroad.
Investing within the global fixed income markets adds elements to your portfolio which may over time help your overall returns. Adding a global component to your strategy will help provide greater diversification, which is crucial to a portfolio. The introduction of diversification is a concept everyone is aware of when referring to your broad asset type mix. It is one way to help mitigate risk and reduce volatility. Since 2000, there has been a global trend to diversify away from U.S. dollar currency reserves. This trend is highlighted by the currency composition of foreign exchange reserves (COFER) computed by the IMF. This shows that there is a steady decline in the U.S. dollar as a proportion of total foreign exchange holdings from 50% in 2000 to 34% in 2010. Simply put, less demand for USD reserves places downward pressure on USD-denominated debt, which could benefit foreign bond markets.
