US interest rates look set to rise in 2015, and that’s unsettling for some fixed-income investors. But here’s the good news: US bonds aren’t the only game in town.

At a time when US defined contribution plans are seeking to control risk and enhance returns, hedged global bonds can improve outcomes for participants and sponsors. But how do plans incorporate global bonds in core menus and target-date funds?

This is the time of year when, in almost every American household, the tinkerer in the family eyes the recipe box. Certain venerable traditions will make it to the Thanksgiving table intact. A cousin or an in-law is sure to bring an entirely new dish. And some traditional plates could use some freshening up. That’s the case with core fixed income.

With the US dollar poised to rise, there’s never been a better time to reposition into global bonds as your core mandate. But when you do, it’s critical to fully hedge that global portfolio against currency risk.

US interest rates are likely to head up gradually over the next several years, now that the long tailwind from a three-decade-long rate decline has subsided. With bonds still an important part of many portfolios, what should investors be thinking about?

A reader of our recent blog post about stocks in rising-rate environments asked us for more details on the magnitude and timing of any stock-market sell-offs during those periods. They were uncommon but ugly, so we thought our answer warranted another post.

Stocks have generally performed very well in rising-rate environments. But the current rate cycle is unlike any other of the past 40 years, keeping investors on edge. A lot will depend on how inflation behaves.

A US-only bond investor is affected by one business cycle, one yield curve and a single monetary policy. As long as rates were falling, that seemed like a good thing. Not so these days.

US defined contribution (DC) plan sponsors large and small are seeking ways to help plan participants achieve better outcomes. Over the last 30 years, compelling evidence has accumulated that suggests currency-hedged global bonds may be an important part of the solution.

Within US defined contribution (DC) target-date funds (TDFs), whether we’re considering customized TDFs for larger plans or packaged solutions for smaller plans, our research shows that having a bond allocation that is not US-centric can lead to better outcomes and enhance the effectiveness of the glide path.

At a time when plans are seeking to control risk and enhance returns, hedged global bonds can help improve outcomes for US defined contribution (DC) investors. Hedged global bonds have delivered better risk-adjusted results over time than US bonds. So how do we recommend plan sponsors incorporate global bonds, and what is the ideal allocation in core menus?

Many US defined contribution (DC) plan sponsors are seeking solutions aimed at reducing undue volatility—excess volatility without a commensurate increase in return—that can prevent a plan and its participants from achieving their long-term objectives. Our research suggests that hedged global bonds may be one solution.

For liability-driven investors, exposure to global bonds offers important benefits: a strong correlation to domestic debt, with greatly reduced volatility. However, these are not the only positives. Today, we’ll look at some other important benefits—such as greatly expanding the investable universe and offering a natural hedge against the tail risk of a domestic credit crisis—and then examine some of the practicalities of introducing global bond allocations within an LDI framework.