Investors in global fixed income markets typically hedge their currency exposure to reduce volatility. In some cases, however, selected unhedged currency exposures can bring additional yield and even help to anchor a portfolio during volatile periods. This suggests that investors may benefit from adopting a more nuanced approach to currency hedging than is typically practiced.
In this paper, the third in a series of articles on the search for yield, we focus on how a selective approach to hedging overseas bond exposure may help to boost yields while also reducing portfolio volatility.
As we noted in an earlier blog post, home‑country government bonds are often seen as the least risky building block for multi‑asset portfolios. As the yields on many government bonds have increased sharply in recent months, investors looking for income are again finding a place for such assets in their portfolios. However, heavy exposure to home‑country bonds brings risks, particularly if the sovereign creditworthiness of the home country comes under scrutiny—as has happened numerous times this century, including some large developed eurozone countries. Investing in overseas sovereign bond markets can, therefore, improve diversification and boost the "shock absorption" qualities in a portfolio.
This post was funded by T. Rowe Price
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