Overcoming Inertia: How Home Bias Hurts US Investors

US investors often stick to US markets. But that could be a costly mistake—especially today.

Compared with US bonds, global bonds hedged to the US dollar have historically been less volatile and generated higher risk-adjusted returns. That’s not the only reason that a home bias may present significant opportunity costs: hedged global bonds also have demonstrated better defensive characteristics than US bonds.

We saw this most recently in 2022—the worst year on record for bond markets. During that year, hedged global bonds outperformed US-only bonds due to the scale of the global bond market and the benefits of diversifying across globally disparate business and policy cycles.

That hedged global bonds outperformed US bonds during a downturn is not surprising given hedged global bonds’ track record of providing attractive up/down capture ratios relative to US bonds (Display). In fact, over the past 40 years, hedged global bonds have captured 86% of gains when US bonds rallied. Conversely, when US bonds sold off, hedged global bonds experienced just 66% of that downturn.

Historically, Global Bonds Have Diversified US Bond Risks

We’re now facing a different environment than in 2022, when central banks began to aggressively hike rates to stem the inflationary tide. Global yields are coming off their highest levels in a decade, monetary and fiscal policies are diverging globally, and unique credit opportunities offer new sources of alpha. We think all these conditions favor global fixed-income exposure.