US and international bond rates diverge due to US productivity, impacting bond ETF appeal.

The divergence between US and international bond rates is driven by stronger US productivity, raising the neutral interest rate and reducing the attractiveness of foreign bonds for US dollar investors. Past disruptions like COVID-19 and the Iran war temporarily masked this trend, but it is now re-emerging. Europe and Japan face demographic and productivity challenges, likely keeping their rates near zero, while hedging costs reduce returns for US investors in international bond ETFs like BNDX. The US bond market (BND) is also less attractive if rates stay high longer, leading the author to rate both BND and BNDX as Hold rather than buy. Investors might be better off buying bonds directly rather than betting on rate movements through these ETFs.