Bond Allocation

[ToushiTime]

The risk is the same for foreign bonds as it is for foreign stocks, if you're talking about currency risk.

I don't think so, right?

Bonds are literally priced in the currency, so are exposed to currency risk.

Stocks are based on business performance. If the currency the stock is priced in strengthens/weakens, then theoretically the stock price will adjust accordingly. One recent example is the rise in GBP value of UK stocks after Brexit. No fundamental change in stock value, just a devaluation of the currency.

Of course the currency valuation is likely to affect the business, so there is some exposure.

Surely bond prices are impacted more by interest rates than currency strength?
I think you mean stocks are inflation-proof as they depend on expectations for corporate earnings which depend partly on company prices that usually rise with inflation.
Bonds don't have that, which is why I bought some TIP ETFs.

[TokyoBoglehead]

The risk is the same for foreign bonds as it is for foreign stocks, if you're talking about currency risk.

I don't think so, right?

Bonds are literally priced in the currency, so are exposed to currency risk.

Stocks are based on business performance. If the currency the stock is priced in strengthens/weakens, then theoretically the stock price will adjust accordingly. One recent example is the rise in GBP value of UK stocks after Brexit. No fundamental change in stock value, just a devaluation of the currency.

Of course the currency valuation is likely to affect the business, so there is some exposure.

Surely bond prices are impacted more by interest rates than currency strength?
I think you mean stocks are inflation-proof as they depend on expectations for corporate earnings which depend partly on company prices that usually rise with inflation.
Bonds don't have that, which is why I bought some TIP ETFs.

Currency risk relates to the difference between the currency the asset is priced in and the currency you currently operate in.

It's independent of bonds themselves and dependent on the specific currencies.
...
Also take a note of how TIPs performed in 2022. They may not be the vehicle you want


Currency swings can be much larger and imore impactful.

[northSaver]

The risk is the same for foreign bonds as it is for foreign stocks, if you're talking about currency risk.

I don't think so, right?

Bonds are literally priced in the currency, so are exposed to currency risk.

Stocks are based on business performance. If the currency the stock is priced in strengthens/weakens, then theoretically the stock price will adjust accordingly. One recent example is the rise in GBP value of UK stocks after Brexit. No fundamental change in stock value, just a devaluation of the currency.

Of course the currency valuation is likely to affect the business, so there is some exposure.

Sorry, I'm not sure I follow. To make it simple, if you have a Japanese bond fund that holds only USD bonds, and a Japanese stock fund that holds only USD stocks, and the USD.JPY rate suddenly drops 10% overnight for some reason, then in the morning both funds (priced in yen) will be down 10% won't they?

[ToushiTime]

Currency risk relates to the difference between the currency the asset is priced in and the currency you currently operate in.

It's independent of bonds themselves and dependent on the specific currencies.
...
Also take a note of how TIPs performed in 2022. They may not be the vehicle you want

Currency swings can be much larger and more impactful.

I agree on the first and second points.

On the third point and fourth points, TIPs fell in 2022 due to issues with pricing in inflation, and the effects of interest rate factors, more than currency factors.
Read this
"While TIPS can protect investors against inflation over the long run, they aren't necessarily a short-term "hedge," as recent experience has shown. Over short periods of time, price declines can offset the principal adjustment from rising inflation. That's what happened last year—yields rose so sharply that the decline in prices more than offset the surge in inflation."
https://www.schwab.com/learn/story/why- ... -inflation
https://www.schwab.com/learn/story/trea ... about-tips
Neither this nor the other articles I read said the underperformance of TIPs in 2022 was primarily due to currency swings.

[ToushiTime]

The risk is the same for foreign bonds as it is for foreign stocks, if you're talking about currency risk.

I don't think so, right?

Bonds are literally priced in the currency, so are exposed to currency risk.

Stocks are based on business performance. If the currency the stock is priced in strengthens/weakens, then theoretically the stock price will adjust accordingly. One recent example is the rise in GBP value of UK stocks after Brexit. No fundamental change in stock value, just a devaluation of the currency.

Of course the currency valuation is likely to affect the business, so there is some exposure.

Sorry, I'm not sure I follow. To make it simple, if you have a Japanese bond fund that holds only USD bonds, and a Japanese stock fund that holds only USD stocks, and the USD.JPY rate suddenly drops 10% overnight for some reason, then in the morning both funds (priced in yen) will be down 10% won't they?

I can see his point in the sense that if a currency depreciates, that can sometimes lead to inflation from more costly imports. Share prices adjust to inflation better than bonds because corporate earnings are lifted nominally as companies respond by raising prices. With bonds - at least existing bonds - the inflation just erodes the value of the bond. So you have the added negative impact of this in addition to simply getting less yen for your dollar,euro whatever.

[northSaver]

I can see his point in the sense that if a currency depreciates, that can sometimes lead to inflation from more costly imports. Share prices adjust to inflation better than bonds because corporate earnings are lifted nominally as companies respond by raising prices. With bonds - at least existing bonds - the inflation just erodes the value of the bond. So you have the added negative impact of this in addition to simply getting less yen for your dollar,euro whatever.

Yes, I thought about this some more after I went to bed Also if USD.JPY declines then it should make it easier for American companies to sell their products to Japanese consumers, or to any country if the rate decline is due to USD depreciation, which should help them make more profit, which should increase their share price over time. The opposite is true for importers I suppose, though there is the inflation issue you mentioned.

Yeah, it's complicated. But over time, I admit that there probably isn't a one-to-one relationship between currency risk for bonds and currency risk for stocks. Good point chaps!

[TokyoBoglehead]

Can anyone recommend some good resources on foreign bonds, specifically from the perspective of a Yen based investor?

I am really open to new perspectives on the matter, but I feel most data offered is western biased.

Furthermore, the sheer number of currency hedged bond funds shows how seriously the investment community here takes currency risk.

[adamu]

if you have a Japanese bond fund that holds only USD bonds, and a Japanese stock fund that holds only USD stocks, and the USD.JPY rate suddenly drops 10% overnight for some reason, then in the morning both funds (priced in yen) will be down 10% won't they?

Yes, you're right. I was thinking if the USD devalued in general (compared to all currencies), then stocks, which have underlying value independent of the currency, would preserve their value because the price in USD would increase to compensate for the devalued dollar. However bonds would remain the same, thus be worth less in JPY. But if it's just the JPY that strengthened, then it's as you say (I think).

Can anyone recommend some good resources on foreign bonds, specifically from the perspective of a Yen based investor?

Maybe we can figure it out and make one

[sutebayashi]

Can anyone recommend some good resources on foreign bonds, specifically from the perspective of a Yen based investor?

A plug for the asset allocation tool at myindex.jp again

But I’ve been thinking about that data.
1) In a prior comment I noted that gold (in yen terms but dollar terms too) is at close to all time highs, so it doesn’t matter much how long a time frame one uses; gold performance looks good because it’s at all time highs.
2) The same is true for foreign assets right now because the yen has been the trash of the major currencies recently. (Could be worse, the Turkish lira is an absolute disaster already...)

So it would be nice if the data at myindex.jp could be sliced up to arbitrary endpoints, so one could compare asset performance through times of old when the yen was stronger, strengthening, or at least steadier.

Still, if one is doing tsumitate style investing, long term, the time distribution should damper the effects of currency volatility, unless the yen enters a persistent strengthening trend for some reason… (I would expect to see a major policy change announced by Japanese authorities for that to happen...)

I am really open to new perspectives on the matter, but I feel most data offered is western biased.

Did a Google now to see what’s out there. (Loads.)
This one covers your point about currency risk nicely. It additionally argues currency hedging isn’t worth it and that the GPIF doesn’t do that either.
https://media.rakuten-sec.net/articles/amp/41039
But I find other articles pushing currency hedged funds.

I like how this one covers both merits and demerits and suggests ways to deal with the demerits:
https://toushin-plaza.jp/column/foreign-bond/
Currency moves are noted as both merits and demerits, which is kind of amusing since the investment vehicle is bonds. But that speaks to the degree that currency fluctuations do seem to be a big part of the driver of returns (or potential losses.)

[northSaver]

So it would be nice if the data at myindex.jp could be sliced up to arbitrary endpoints, so one could compare asset performance through times of old when the yen was stronger, strengthening, or at least steadier.

Actually I think there's a rough way to do that if we use the graph in the "資産価値がどのように変化したか" section, together with a long-range USD.JPY chart and a calculator. There's also the "大暴落！ あの時のリターンは？" section if we want to compare asset class performance during market crashes.

I'll try to write a post later today that compares foreign bonds and stocks in yen terms during periods of yen weakening, strengthening and stability. If it's any good we might even be able to add it to the RetireWiki.jp