Over each of the past five years, the returns on a diversified international bond portfolio fully hedged back into Australian dollars have well exceeded the return realised on a typical Australian bond portfolio. As a result, many fixed interest clients are looking to increase allocations to international bonds. This paper examines some of the reasons why international bond portfolios have outperformed their Australian counterparts and asks whether this is likely to continue. It also considers what this means for current portfolio construction considerations as, in a rising yield curve environment, tactical asset allocation will become more important to help minimise p...

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