LDI: Reducing Downside Risk with Global Bonds

Abstract

Most LDI portfolios utilize long-maturity domestic bonds, with the assumption that they are the best match for longterm liabilities, such as pension obligations.This article investigates whether the addition of currency-hedged global bonds can improve the performance of a LDI portfolio. In the major bond markets studied, the authors found that from the late 1980s through 2011, a portfolio of currencyhedged global long-term bonds captured most of the upside return of domestic long-term bonds but less than half of the downside return. Hedged global bond returns were highly correlated with domestic bond returns, but with fewer extremes and a higher return–risk ratio than domestic bonds.

TOPICS: Fixed-income portfolio management, global, pension funds