Global Bond Markets — Comparing Treasuries, EM Bonds, and High-Yield

The Size of the Global Bond Market

The bond market is larger than the stock market.

Global Bond Market (as of 2024):

Total size: ~$130 trillion (approximately 1.3× the equity market)

Composition:

Government bonds (developed markets): 45%
Corporate bonds: 25%
Emerging market bonds: 15%
Other: 15%

US Treasuries (UST)

Why US Treasuries Are the Benchmark

The standard for risk-free assets

The dollar = the world’s reserve currency
United States = virtually zero default risk
Liquidity: hundreds of billions traded daily

The spread benchmark for all risk assets

Corporate bond yield = Treasury yield + credit spread
Emerging market bond yield = Treasury yield + country risk premium

Types of US Treasuries

T-Bills: maturity up to 1 year (short-term)
T-Notes: maturity 2–10 years (medium-term) ★ The 10-year is the most watched benchmark
T-Bonds: maturity 20–30 years (long-term)
TIPS: Treasury Inflation-Protected Securities

The 10-year Treasury yield

Benchmark for mortgage rates
Discount rate for equity valuations
Directional influence on the strength or weakness of the dollar

Emerging Market Bonds (EM Bonds)

Types

Hard Currency EM Bonds (Dollar-Denominated)

Issued by emerging-market countries in US dollars
No currency risk
Only country default risk to consider
Representative index: JP Morgan EMBI+

Local Currency EM Bonds

Issued in the domestic currency (e.g., Brazilian Real, Indian Rupee)
Higher interest rates
Additional currency risk
Representative index: JP Morgan GBI-EM

Risks of EM Bonds

Country risk: sovereign default (Argentina, Sri Lanka as examples)
Currency risk: EM currency depreciation → reduced returns in home currency terms
Liquidity risk: difficult to sell during crises
Political risk: regime change, policy shifts

Why Invest in EM Bonds?

Higher yields than developed markets:

US 10-year Treasury: ~4% (as of 2024)
India government bonds: ~7%
Brazil government bonds: ~12%
Indonesia: ~6.5%
Note: subtract currency hedging costs to get the real effective spread

High-Yield Bonds

Characteristics of Sub-Investment-Grade Bonds

Credit rating: BB+ or below (below investment grade)

Alias: Junk Bonds

Why the higher yield?

Compensation for credit risk (probability of default)
Liquidity premium
High sensitivity to economic cycles

Historical returns:

2–5 percentage points above investment grade bonds per year

However, default rates spike in recessions, which can cause losses

High-Yield vs Equities

Characteristics of high-yield bonds

Fall alongside stocks when equities decline (credit risk = cyclical sensitivity)
Less volatile than stocks (bonds have a floor value)
Similar income characteristics to dividend-paying stocks
Conclusion: high-yield bonds sit between bonds and stocks
They do not provide the full defensive qualities of investment-grade bonds

Dollar Strength/Weakness and Global Bonds

Dollar strength environment:

Unfavorable for EM bonds (higher burden of servicing dollar-denominated debt)
Favorable in home-currency terms for dollar-denominated bond holders
Losses for investors holding local-currency EM bonds

Dollar weakness environment:

Favorable for EM bonds (capital inflows)
Maximizes returns on local-currency bonds
Rising commodity prices → improvement for commodity-exporting EM countries

How International Investors Can Access Global Bonds

Currency hedge decision

Hedged: eliminates currency risk, but hedging costs arise (0.5–2% per year)
Unhedged: a bet on the direction of the dollar — potential additional gains or losses

Practical choices

Short-term (1–2 years): US short-term Treasuries unhedged (dollar income + conversion)
Medium-to-long-term: strategically maintain dollar exposure (risk diversification)
Emerging markets: use global EM bond ETFs for diversification

How to Access Global Bonds

Direct investing (difficult)

High minimum investment and low accessibility
Complex tax, currency exchange, and custody arrangements

ETF approach (recommended)

AGG: iShares Core U.S. Aggregate Bond (Treasuries + corporates)
BND: Vanguard Total Bond Market
TLT: iShares 20+ Year Treasury Bond
SHY: iShares 1-3 Year Treasury Bond
EMB: iShares JP Morgan USD Emerging Markets Bond
HYG: iShares iBoxx $ High Yield Corporate Bond

Key Takeaways

US 10-year Treasury = global risk-free rate benchmark EM bonds: dollar-denominated (no currency risk) vs local-currency (currency risk present) High-yield = junk bonds = cyclically sensitive, higher returns, default risk Dollar strength → unfavorable for EM; dollar weakness → favorable for EM