At Eaton-Cambridge, every portfolio decision is guided by the same core principles: long-term thinking, broad diversification, disciplined implementation, and evidence-based investing. Those principles have long shaped how we build equity portfolios, and they are equally important in fixed income.
That is why we have expanded our use of international bonds within the fixed income portion of our investment models. This is not a short-term call or a reaction to recent market performance. It is a deliberate, research-driven decision designed to improve portfolio resilience, diversification, and long-term outcomes.
A Broader Opportunity Set
One of our foundational beliefs is that markets reward investors who diversify broadly rather than concentrate narrowly. When most investors think about bonds, they think about the U.S. market (and understandably so, as it’s the largest and most familiar). But the U.S. actually represents only about 41% of the global investment-grade bond market. That means nearly 60% of high-quality bond opportunities exist outside our borders.
Compare that to equities, where the U.S. accounts for over 65% of global market capitalization. The case for international diversification is arguably stronger in fixed income than it is in stocks, yet most portfolios reflect no international bond exposure at all. From our perspective, that represents a meaningful opportunity. One that aligns directly with our belief in accessing the full global opportunity set.
Share of global investment-grade bond market by region, as of Dec 31, 2024
Source: Bloomberg Global Aggregate Bond Index, Dec 31, 2024. Reflects investment-grade bonds only.
Diversification That Works When It Matters Most
The core argument for holding international bonds is not that they will always outperform. It is that they tend to move differently than U.S. bonds, and that difference is what reduces overall portfolio risk.
Each country operates its own economy, sets its own interest rates, and moves through its own economic cycle. When U.S. interest rates rise, that does not mean rates are rising in Japan, Australia, or Germany at the same pace or at the same time. Research covering 1985 through 2025 shows that yield changes across major developed markets — Canada, the U.K., Germany, Australia, Switzerland, and Japan — have relatively low correlations with U.S. yield changes. Japan, for example, shows a correlation of just 0.23 with the U.S. over that period.
By broadening fixed income exposure to include global government bonds hedged to the U.S. dollar, historical data shows that a globally diversified allocation maintained similar returns to a U.S.-only short-term bond allocation over 1–3 year periods, while reducing volatility by more than 20%. Same return. Meaningfully less risk. That is the definition of a worthwhile diversification decision.
Annual returns: U.S. bond index vs. global bond index (hedged to USD), 2008–2024
Source: Bloomberg U.S. Aggregate Bond Index and Bloomberg Global Aggregate ex-USD Bond Index (hedged to USD), annual returns 2008–2024. Past performance is not a guarantee of future results.
Different Markets, Different Cycles, Better Balance
The diversification benefit is not limited to short-term bonds. Looking at data from September 2000 through September 2025, global bond indices delivered higher returns than their U.S.-only equivalents at both the short-term and aggregate levels. The Global 1–3 Year index returned 2.92% annualized over that period, compared to 2.83% for the U.S. equivalent, with lower volatility. More return, less risk, over a 25-year window. That is not a coincidence; it is genuine diversification working as intended.
At times, U.S. bonds may benefit from falling rates or strong Treasury demand. At other times, international markets offer higher yields or more attractive term structures. Recent periods of relative underperformance in international bonds have largely reflected regional differences in monetary policy, not structural weakness in global fixed income markets. Importantly, higher rates abroad have improved forward-looking expected returns across many global bond markets, enhancing the long-term role international bonds can play in balanced portfolios.
Currency Risk Is Managed Intentionally
We recognize that investors often associate international investing with currency risk. It is a legitimate concern, and it is exactly why our approach to global fixed income emphasizes hedging currency exposure back to the U.S. dollar.
Research is clear on this point: unhedged foreign currency exposure can dominate bond portfolio returns and undermine the stability that fixed income is meant to provide. Hedging removes that problem. What remains is the pure benefit of global yield-curve diversification, without layering in currency speculation. This aligns directly with our broader philosophy: take risks where you expect to be compensated, and manage risks that are unlikely to be rewarded.
A Long-Term Decision, Not a Tactical Shift
At Eaton-Cambridge, we do not build portfolios around short-term predictions or recent performance trends. We focus on structural improvements that enhance portfolio efficiency across a wide range of market environments. Just as leadership rotates between U.S. and international equity markets over time, bond markets also move through cycles. Global diversification is most effective when maintained consistently, not added or removed based on what happened last quarter.
Expanding fixed income beyond U.S. borders reflects that mindset. It reduces concentration risk, introduces diversification from economies and yield curves that move independently of the U.S., and does so in a currency-hedged, research-backed way that is consistent with how we manage every aspect of client portfolios.
Over time, the compounding effect of reduced volatility and improved risk-adjusted returns is exactly the kind of quiet, disciplined advantage we are always looking to build into your financial plan.
As always, if you have questions about this change or how it affects your specific allocation, we are happy to walk through it in detail.