Why investors may want to prioritize bond markets outside the U.S.

• The European Central Bank raised rates 25 basis points to 2.25% on June 11, while the Fed hasn't hiked since July 2023, creating divergent monetary policy cycles
• Short to intermediate duration global government bonds from developed markets with central banks 'tethered to inflation' offer diversification benefits for U.S.-centric portfolios
• BlackRock's Steve Laipply notes European fixed-income securities offer lower risk and higher yields compared to U.S. markets

Summary: International Bond Markets Offer Diversification Opportunities for U.S. Investors

Key Recommendation: George Bory, Chief Investment Strategist at Allspring Global Investments, advises U.S. investors to diversify into international government bonds, particularly in developed markets with central banks actively managing inflation.

Main Investment Thesis:

Bory recommends "short to intermediate duration global government developed market bonds," specifically targeting countries like the UK, Europe, and Australia where central banks are raising rates or have different inflation dynamics than the U.S. The strategy involves mixing international duration with U.S. duration to benefit from different rate cycles.

Key Market Context:

• The Federal Reserve hasn't hiked rates since July 2023
• Market pricing shows a 78% probability of Fed rate hikes by December (declining to 68% by January 2027)
• The European Central Bank raised rates by 25 basis points to 2.25% on June 11
• Bond markets globally have already priced in substantial inflation expectations and central bank tightening

Supporting Perspective:

Steve Laipply, global co-head of fixed income at BlackRock, echoes this view, highlighting European fixed-income securities that offer lower risk and higher yields compared to U.S. alternatives.

Investment Rationale:

Bory notes that many bond investors remain "very US-centric" despite the massive global bond market offering diversification benefits. International bonds from central banks "tethered to inflation" that move aggressively can benefit bond investors while providing portfolio diversification across duration, credit risk, and security selection.

Market Implication: The recommendation suggests potential yield advantages and risk mitigation through geographic diversification as global central banks operate on different monetary policy timelines.