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Bonds typically rise during bear markets during the flight to safety phase. But because bear markets are sometimes country-specific, does it stand to reason that the best way is to dampen volatility is to own bonds in the same country as the invested equities?
For example, I'm a Canadian investor and my equity is 30% Canadian, 35% US, 15% India, 10% Europe, 10% everything else. But my bonds are almost entirely Canadian. Can my volatility be dampened further by selling some Canadian bonds to buy some US bond and European bond funds to hedge against potential bear markets in those blocs?
Does my question make sense? It's more of a theoretical question, since it's 95% likely that an American bear market would induce a Canadian bear market anyway.
PS: I'm referring only to high quality government bonds, like the US and Canadian government bonds that rose by over 10% during the 2008 crisis.
Possibly, but I think the effect is small since the central banks usually have more control over bond rates and prices than the economy, with the exception of bonds of longer duration.
Doesn't necessarily have to be the same countries as your stock investments, but I think it's good to have some geographical diversification in bonds too.
How much would your volitility be damped? Have you taken currency conversions and price movements into account?
No, that's a good point. I get quoted a pretty loose spread for converting CAD/USD, so it would have to be a very long term investment.
I like having USD currency exposure though, given its somewhat negative correlation to North American equities.
the only thing that consistanly seems to offest those big drops in our market is treasury bonds.
unless inflation is the reason for the drop everything else is either not teliable enough or depends on the same conditions stocks do to thrive..
in recent times i can't think of any big drops in our markets here that were offset with any kind of foreign bonds or even foreign stocks for that matter.
Bonds typically rise during bear markets during the flight to safety phase. But because bear markets are sometimes country-specific, does it stand to reason that the best way is to dampen volatility is to own bonds in the same country as the invested equities?
For example, I'm a Canadian investor and my equity is 30% Canadian, 35% US, 15% India, 10% Europe, 10% everything else. But my bonds are almost entirely Canadian. Can my volatility be dampened further by selling some Canadian bonds to buy some US bond and European bond funds to hedge against potential bear markets in those blocs?
Does my question make sense? It's more of a theoretical question, since it's 95% likely that an American bear market would induce a Canadian bear market anyway.
PS: I'm referring only to high quality government bonds, like the US and Canadian government bonds that rose by over 10% during the 2008 crisis.
In theory, it might help, but you're also introducing currency risk. You might want a fund that hedges your currency so there are no fluctuations as a result....but then you have the problem of interest rates being super low in most developed countries and emerging market countries being riskier..
There are no easy solutions.
I have Templeton Global Bond. I believe there is a Canadian version of this fund as well. It has good long term returns but it is more volatile than a typical bond fund.
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