BlackRock fund manager says investors can boost income by going global with government bonds

BlackRock's Tom Becker advocates for institutional investors to diversify fixed-income portfolios into foreign government bonds, arguing that U.S.-centric allocations are overly correlated with domestic business cycles and inflation. Through the iShares Global Government Bond USD Hedged Active ETF (GGOV), he aims to achieve lower volatility and enhanced yields by hedging currency risk to capture interest rate differentials, favoring countries with central banks cutting rates and moderating inflation. Becker identifies opportunities in European bonds, including German and French government bonds, and select emerging markets like Mexico and China, while cautioning that the market may be overestimating the likelihood of future Fed rate cuts given potential U.S. inflation stickiness.

Analysis

BlackRock's Tom Becker advocates for institutional investors to diversify fixed-income portfolios into foreign government bonds, arguing that U.S.-centric allocations are overly correlated with domestic business cycles and inflation. His iShares Global Government Bond USD Hedged Active ETF (GGOV) offers a 2.56% 30-day SEC yield and a 0.39% net expense ratio, though U.S. Treasurys still comprise 33% of its holdings as of Oct. 10.

The strategy aims to achieve lower volatility and enhanced yields by hedging currency risk, thereby capturing interest rate differentials between central banks without direct FX exposure. This approach provides diversification against single-country shocks, as evidenced by the 2022 U.S. bond performance. For instance, combining a 2.5% German Bund yield with a 2% ECB-Fed rate differential can result in a 4.5% aggregate yield.

Becker targets countries with central banks cutting rates, low and moderating inflation, and more austere fiscal policies, contrasting with the U.S. where inflation stickiness is attributed to large budget deficits. He suggests the market may be mispricing future Fed rate cuts given the central bank's commitment to inflation-fighting credibility and a strong U.S. economy.

Specific investment preferences include European bonds, such as German Bunds and French government bonds, due to attractive inflation-adjusted yields and less expansive fiscal policies. Within emerging markets, Becker identifies opportunities in Mexican and Chinese government bonds, citing low and falling inflation in Mexico and negative inflation in China.

Key Decisions for Investors

• Consider diversifying fixed-income allocations into global government bonds to mitigate U.S.-specific correlation risks and enhance portfolio ballast.
• Evaluate currency-hedged global bond ETFs, such as GGOV, for potential yield uplift from interest rate differentials and reduced volatility.
• Monitor central bank policy divergence and fiscal austerity in foreign markets, as these factors are key drivers for attractive real yields and investment opportunities.
• Re-evaluate expectations for aggressive Fed rate cuts, acknowledging potential U.S. inflation stickiness and the Fed's commitment to its inflation-fighting mandate.