Global Bonds: How Hedging Can Enhance Low Local Yields

(Harvest) Despite low bond yields in many countries outside the U.S., hedged yields may be quite attractive for U.S. dollar-based investors. Japanese government bonds yield virtually zero. Yields on German bunds remain stuck below 50 basis points (bps). U.K. gilts yield only about 125 bps. Do non-U.S. bonds such as these hold any value to dollar-based investors?

Yes, quite a bit, it turns out. For a dollar-based investor, hedging foreign currency exposure on lower-yielding global bonds may potentially result in higher yields than U.S. Treasuries. Essentially, investors are getting paid to hedge the currency risk back to the US dollar. Other potential benefits for those who invest internationally and hedge their U.S. currency exposure include improved diversification and defense against rising U.S. interest rates.

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