Haystack wrote: ↑Thu Feb 03, 2022 9:07 am
I think my fundamental issue is your assertion about them not being correlated for Japanese investors. That simply doesn`t follow logically.
The lack of correlation between two things is held independent of other factors.
You’re right in saying that the lack of correlation between two things is held independent of other factors. I believe the reason for the different correlations is because we’re actually comparing two different sets of variables.
The correlation coefficient is calculated using the returns of two different assets at set intervals over a period of time. On one hand, an American investor would be looking at the returns of stocks and bonds in the local currency, the USD. On the other hand, a Japanese investor would be using the currency-adjusted returns in yen. These returns are going to be different from the returns in the local currency, and we can thus it's not unreasonable to expect different correlation coefficients. The difference is going to be bigger when the currency returns are large in relation to the local currency returns of one or more of the assets, in this case bonds.
If that's not the case, how would you account for the positive correlations calculated by the GPIF and MUFJ?
They are not "uncorrelated" for a Japanese investor. That is all I am saying. Perhaps you intended to say "For Japanese investors currency risk presents complications when investing in foreign dementated sovereign bonds." And to that end, I included the paired TYO listed Hedged version.
I meant what I said and have provided links showing the positive correlation. However, I should have been clearer by saying "
unhedged foreign stocks and bonds are somewhat correlated for Japanese investors" because the risk and returns of hedged bonds are more like domestic ones.
Yes, foreign currency denominated bonds do present complications. And they are the complications I've been talking about all along. That is, they are more volatile and more correlated with stocks than either domestic bonds or hedged alternatives.
It's not that hedged bonds are just an alternative for people worried about currency risk. It's that the currency risk of unhedged bonds makes them no longer act like bonds. If you really want something low-risk and uncorrelated to stocks then you're left with domestic or hedged bonds.
This guy seems to think unhedged foreign bonds aren't worth the trouble and I tend to agree with him.
. J-REITs are also weakly correlated. Here are some links showing the correlations: