Would BNDX (USD Hedged Non-USD Bond Fund) Protect against USD Inflation?

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lyrictulip
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Would BNDX (USD Hedged Non-USD Bond Fund) Protect against USD Inflation?

Post by lyrictulip »

One of the increasing anxieties these days is that the US Government's increasingly lax approach to printing trillions of extra dollars might (some think, will) inexorably lead to inflation, possibly quite substantial inflation, in the near future. I was wondering if a reasonable response to this anxiety would be to diversify from BND (US Total Bond Index) to BNDW (Total World Bond Index), effectively splitting my bond exposure 50-50 between USD and non-USD bonds.

The question is, would this actually help? Or am I overthinking things?
dsasdg
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Re: Would BNDX (USD Hedged Non-USD Bond Fund) Protect against USD Inflation?

Post by dsasdg »

It does not protect against the dollar inflation that you mentioned that is not accounted for in the price.

https://www.cmegroup.com/trading/fx/g10 ... lobex.html
Blue456
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Re: Would BNDX (USD Hedged Non-USD Bond Fund) Protect against USD Inflation?

Post by Blue456 »

lyrictulip wrote: Tue Apr 20, 2021 4:47 am One of the increasing anxieties these days is that the US Government's increasingly lax approach to printing trillions of extra dollars might (some think, will) inexorably lead to inflation, possibly quite substantial inflation, in the near future. I was wondering if a reasonable response to this anxiety would be to diversify from BND (US Total Bond Index) to BNDW (Total World Bond Index), effectively splitting my bond exposure 50-50 between USD and non-USD bonds.

The question is, would this actually help? Or am I overthinking things?
No. Hedged international bonds do not protect against inflation. You will need short term treasuries, tips or unhedged international bonds.
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lyrictulip
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Re: Would BNDX (USD Hedged Non-USD Bond Fund) Protect against USD Inflation?

Post by lyrictulip »

Blue456 wrote: Tue Apr 20, 2021 5:41 am Hedged international bonds do not protect against inflation. You will need short term treasuries, tips or unhedged international bonds.
I guess I’m wondering if this is strictly true, in practice, in particular with reference to BNDX? Two points that make me wonder:

1) It seems to me that much of the “inflation risk” ultimately actually manifests as “interest rate risk”. If US dollars are experiencing inflation, then US interest rates will rise. Does diversification to non-US bonds not mitigate at least the interest rate risk?

2) What BNDX is actually doing to hedge is selling “forward the total value of the underlying non-USD currencies at a one-month forward rate to hedge against fluctuations in the relative value of the non-USD component currencies in relation to the USD. The hedge is reset on a monthly basis.”
Since the hedge is only monthly, I think? that on the downside this means it can only really smooth out currency fluctuations on a month-by-month basis (it cannot totally protect you against currency exchange risk) but on the upside it means that you are ultimately still also getting the inflation risk diversification?

Or, please tell me, am I deeply misunderstanding something?
invest2bfree
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Re: Would BNDX (USD Hedged Non-USD Bond Fund) Protect against USD Inflation?

Post by invest2bfree »

Just the fact it is hedged it means that it does not protect you against usd devaluation.

You need a unhedged ones like igov or emlc for non us bonds.

My opinion is you donot use bonds for currency devaluation but equities.
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matthewbarnhart
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Re: Would BNDX (USD Hedged Non-USD Bond Fund) Protect against USD Inflation?

Post by matthewbarnhart »

lyrictulip wrote: Tue Apr 20, 2021 4:47 am One of the increasing anxieties these days
Whose anxieties? Yours?
... is that the US Government's increasingly lax approach to printing trillions of extra dollars
Is it increasing? Can you cite sources for this?
... might (some think, will) inexorably lead to inflation, possibly quite substantial inflation, in the near future.
And what about the opinions of those who think otherwise?
I was wondering if a reasonable response to this anxiety would be to diversify from BND (US Total Bond Index) to BNDW (Total World Bond Index), effectively splitting my bond exposure 50-50 between USD and non-USD bonds.

The question is, would this actually help? Or am I overthinking things?
For me, the reasonable response is to tune out the noise. If that's not possible, diversify your media consumption and learn how to analyze and critique the media you consume.
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lyrictulip
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Re: Would BNDX (USD Hedged Non-USD Bond Fund) Protect against USD Inflation?

Post by lyrictulip »

Duplicate post
Last edited by lyrictulip on Tue Apr 20, 2021 9:44 am, edited 1 time in total.
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lyrictulip
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Re: Would BNDX (USD Hedged Non-USD Bond Fund) Protect against USD Inflation?

Post by lyrictulip »

matthewbarnhart wrote: Tue Apr 20, 2021 8:53 am For me, the reasonable response is to tune out the noise. If that's not possible, diversify your media consumption and learn how to analyze and critique the media you consume.
I’m very consciously speaking incredibly passively because I’m skeptical of the premise that I’m proposing. I don’t think it’s possible to use a more passive voice than I have above. If you need a citation for the fact that the US government has already engaged in, and is contemplating more, historic amounts of borrowing, or that this has lead some people (yes, including me) to be anxious about inflation, then you’re not paying attention. If you insist, I suppose I could cite https://www.wsj.com/articles/is-inflati ... 1614614962 or any of a dozen other articles or posts in this forum:
Yet anxiety about inflation is at a fever pitch, among economists and in markets, where long-term interest rates have been grinding higher since President Biden unveiled plans for huge new fiscal stimulus.
Whether it will lead to inflation is obviously highly controversial, But I’m really not interested in that particular question. I’m interested in the question of whether Vanguard’s international bond fund would be a reasonable response to that anxiety?

I gather that your answer to that last question is that I should "drown out the noise" and ignore the concern, which is I suppose fair. As we like to say around here, "when experts disagree, it is often because it does not make a forseeable difference", but I am still curious about my question...
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Re: Would BNDX (USD Hedged Non-USD Bond Fund) Protect against USD Inflation?

Post by secondopinion »

invest2bfree wrote: Tue Apr 20, 2021 8:26 am Just the fact it is hedged it means that it does not protect you against usd devaluation.

You need a unhedged ones like igov or emlc for non us bonds.

My opinion is you donot use bonds for currency devaluation but equities.
But using equities as a currency devaluation hedge raises the general market risk as well; market risk is already a variable that the allocation limits, and we do not need to worsen it. Unhedged international bonds, if high-quality, are strong in this regard to hedge currency devaluation without taking much of any market risk; they carry more volatility due to more variables about currency otherwise.

True hedging is not about reducing overall risk, just reducing risks those that are important for you to reduce at the expense of taking other risks. Here, we seek to reduce currency devaluation risk at the expense of general currency volatility.
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taojaxx
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Re: Would BNDX (USD Hedged Non-USD Bond Fund) Protect against USD Inflation?

Post by taojaxx »

Buy German Bunds. Everybody does, that's why they have negative yield. But that negative yield might look like a great deal 20 years from now. So to answer your question, buy NON hedged NON US bonds.
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Re: Would BNDX (USD Hedged Non-USD Bond Fund) Protect against USD Inflation?

Post by 000 »

lyrictulip wrote: Tue Apr 20, 2021 7:47 am 1) It seems to me that much of the “inflation risk” ultimately actually manifests as “interest rate risk”. If US dollars are experiencing inflation, then US interest rates will rise.
They may or they may not. The Fed may suppress rates. Foreign investors unaffected by US inflation may buy US Treasuries pushing yields down. Relying on rates to rise in a particular fashion that makes this product work in a way it otherwise wouldn't is a bad idea.

CBs around the world are not very dissimilar from the Fed. So foreign fiat may not be such a good diversifier if worried about inflation.
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typical.investor
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Re: Would BNDX (USD Hedged Non-USD Bond Fund) Protect against USD Inflation?

Post by typical.investor »

lyrictulip wrote: Tue Apr 20, 2021 7:47 am
Blue456 wrote: Tue Apr 20, 2021 5:41 am Hedged international bonds do not protect against inflation. You will need short term treasuries, tips or unhedged international bonds.
I guess I’m wondering if this is strictly true, in practice, in particular with reference to BNDX? Two points that make me wonder:

1) It seems to me that much of the “inflation risk” ultimately actually manifests as “interest rate risk”. If US dollars are experiencing inflation, then US interest rates will rise. Does diversification to non-US bonds not mitigate at least the interest rate risk?
Well, whatever other posters wrote notwithstanding, yes I believe that is correct. And I believe Vanguard uses hedged international bonds for this reason.

If inflation causes US rates to rise, then any bonds (or bond funds) with any duration will suffer NAV loss (until the bond or fund can recover at it's duration mark). So yes, having hedged international bonds will allow you to hold a fund with some duration (and higher yield as a result) that you can still sell at no NAV loss if you need to (for spending or rebalancing) should US rates rise.

I feel like this should be clear and easy to understand.

lyrictulip wrote: Tue Apr 20, 2021 7:47 am 2) What BNDX is actually doing to hedge is selling “forward the total value of the underlying non-USD currencies at a one-month forward rate to hedge against fluctuations in the relative value of the non-USD component currencies in relation to the USD. The hedge is reset on a monthly basis.”
Since the hedge is only monthly, I think? that on the downside this means it can only really smooth out currency fluctuations on a month-by-month basis (it cannot totally protect you against currency exchange risk) but on the upside it means that you are ultimately still also getting the inflation risk diversification?

Or, please tell me, am I deeply misunderstanding something?
I am not sure what you believe the upside to be here that is different than your first point. In any case, correct it's a short term contract and not overnight.

In any case, I don't think you are receiving (much) inflation risk protection here. If the short term US rate rises, your hedged international bonds will yield more than before such that they are equal to the yields on US bonds**.

I mean so ask yourself, do US nominal bonds offer inflation protection? It is possible that short term rates are hiked to be above the inflation rate, but it is also possible that they are not. In any case, I don't see hedged bonds offering any more inflation protection than un-hedged ones.

** not exactly though perhaps as hedge yield is based on short rate differences which may or may not equal the rate differences at the duration of your fund (7 or 8 years or whatever it is now), so the international bonds could be yielding more or less than their US counterparts of the same duration. Over time across countries Vanguard believes this will wash out.
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typical.investor
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Re: Would BNDX (USD Hedged Non-USD Bond Fund) Protect against USD Inflation?

Post by typical.investor »

lyrictulip wrote: Tue Apr 20, 2021 9:41 am I’m interested in the question of whether Vanguard’s international bond fund would be a reasonable response to that anxiety?
Perhaps. But why not hold TIPS?

If you are worried about TIPS negative yield, and not sure if inflation will materialize, then hedged international bonds seem like a good choice. You can hold bonds will a little more duration so the current yield won't be as low, but you will be able to sell them without a NAV loss should the short term US rate (and not international ones) rise.

Helpful certainly if US inflation appears, US rates hike and you have a need for spending or rebalancing before your US bond funds can recover but not really inflation protection.

And what if inflation occurs globally (i.e higher manufacturing costs in China cause a ripple)? International bonds won't help you then -either hedged or unhedged.
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Re: Would BNDX (USD Hedged Non-USD Bond Fund) Protect against USD Inflation?

Post by Valuethinker »

lyrictulip wrote: Tue Apr 20, 2021 4:47 am One of the increasing anxieties these days is that the US Government's increasingly lax approach to printing trillions of extra dollars might (some think, will) inexorably lead to inflation, possibly quite substantial inflation, in the near future. I was wondering if a reasonable response to this anxiety would be to diversify from BND (US Total Bond Index) to BNDW (Total World Bond Index), effectively splitting my bond exposure 50-50 between USD and non-USD bonds.

The question is, would this actually help? Or am I overthinking things?
The best response would be to buy US TIPS bonds and ibonds.

By design, both instruments increment their values (and coupons) against inflation. This is somewhat less true in a taxable environment however as as I understand US tax law, the increment in value is taxable ie higher inflation increases the amount of tax you pay.

Diligent use of annual limits (particularly by a couple) can accumulate lots of ibonds.

An unhedged-to-currency international bond fund might protect you against US inflation that was higher than overseas inflation. Maybe - it would depend on what currency exchange rates did.
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lyrictulip
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Re: Would BNDX (USD Hedged Non-USD Bond Fund) Protect against USD Inflation?

Post by lyrictulip »

Thanks all for the very helpful and thoughtful comments, much appreciated.
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