Passive global bond investors may be getting more than they bargained for—in terms of risk, that is. That’s because lower-yielding debt is overrepresented in the benchmark, providing less buffer—and other types of risks may be locked in.
Japan, for example, is by far the largest share of the global bond universe, but it offers negative yields. In contrast, some of the most attractive opportunities today—for example, Australian sovereigns or Japanese inflation-protected debt—are either small components of the index or aren’t in the benchmark at all. That means passive portfolios don’t take advantage of them.
And because market and political risks are dynamic, your portfolio should be too. Upcoming French elections are driving volatility in that region higher today, and many investors want to minimize their exposure to French debt. Passive investors don’t have that option.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.