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At face value, the U.S. 10-year Treasury yield sports a more attractive yield (~4.5%) than sovereign 10-year bond yields across most other developed markets, but these headline yields ignore a key part of the return picture: the hedging premium.
For much of the past decade, U.S.-based investors have had little incentive to look beyond domestic fixed income. Treasury yields were competitive, the dollar was strong and global central banks were running deeply accommodative policies. But today's environment tells a different story—one in which global government bonds, when hedged back to U.S. dollars, may offer a surprising yield advantage for U.S. investors.
At face value, the U.S. 10-year Treasury yield sports a more attractive yield (~4.5%) than sovereign 10-year bond yields across most other developed markets, but these headline yields ignore a key part of the return picture: the hedging premium.
When a U.S. investor buys foreign bonds, currency risk is typically hedged to avoid volatility from exchange rate movements. The cost—or return—of that hedge depends on the interest rate differential between the U.S. and the foreign market. When you hedge, you effectively "lend" at the U.S. rate and "borrow" at the foreign rate—locking in the difference. This difference becomes your hedging premium1. In today’s market, given the Federal Reserve has been more gradual in lowering short term rates relative to most developed market central banks this has created an opportunity whereby U.S. investors can earn a positive hedging return on top of the foreign bond’s local yield.
Take Japanese government bonds for example; hedged into dollars, a 10-year JGB yielding under 2% may deliver a total yield above 5% after including the hedge. Similar dynamics exist in Europe and parts of Asia.
Importantly, this is a structural feature of global markets, not a gamble on currency direction. It's a contractual part of the hedging process, driven by interest rate differentials and foreign exchange forward markets.
Beyond the yield pickup, adding global bonds introduces potential diversification benefits. In our Guide to the Markets (slide 40)2, we show that most government bonds are less positively correlated to US rates than US bond markets, providing that diversification. Moreover, these diversification benefits improve when you consider global corporate bonds and emerging market fixed income.
For U.S. investors concerned around the trajectory of government debt in the US, global government bonds deserve renewed attention given investors can earn more income abroad while lowering domestic concentration risk. Of course, investing globally is not without risk. Investors should be mindful of increased spending in Europe and tightening policy in Japan could put upward pressure on yields offsetting some of the yield pickup, which emphasizes the need for active management when looking abroad. That said, it's clear going global doesn't mean giving up yield—it may mean gaining it.