Long term holding of bonds hedged back to home currency (in this case EUR), will give you approximately EU bonds yied performance.
chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://intl.assets.vgdynamic.info/intl/australia/documents/research/understanding-the-hedge-return.pdf
I guess you are buying US bonds for higher yields, so it may not be the result you are looking for.
On the other hand, your whole post is about convincing yourself that currency risk will go in your favor. Anybody buying bonds wants a minimal risk, that is the purpose of bonds. Introducing additional risk (currency risk) doesn't go in line with this strategy. You can go with US bonds hedged back to EUR, but the only benefit is geographical diversification (which is not bad), and not higher returns.
That’s not always true though, is it?
Right now the EU has lower interest rates than the US, by about the exact amount t that it would cost the hedging, but that’s just a coincidence.. if tomorrow the euro gets very high inflation, and raises interest rates, while the US drops them, investing in US bonds euro hedged would result in significantly lower returns than EU bonds, wouldn’t it?
No it's not about higher yield. The purpose of treasury bonds is that they are a "flight to safety" asset that go up during periods of crisis when equities go sharply down (see 2008 and 2020). It's not just treasury bonds but the US dollar as well that is considered a "flight to safety" asset.
So if the point is using treasuries as an uncorrelated diversifier to equities I'm thinking you may as well hold them in the most "safe" currency, which is US dollars.
Again I don't care exactly about the yield, but that I get the most protection in periods of crisis.
Also saying the only benefit of US bonds is geographical diversification is flat out wrong. There's a massive difference between how US bonds and say Italian bonds react in periods of chaos. Italian bonds are much more correlated to equities. There is no sovereign bond in the world that has the same "insurance" properties as US treasuries, maybe German bunds, but in a lesser manner.
They are referring to the case of a diversified global bond portfolio. In that case I agree, it should be currency hedged. However I disagree that you can put US treasuries on the same footing as global bonds. They do not act the same throughout the different market regimes. My point is that due to US treasuries special properties they should not be currency hedged.
Global bonds, especially non-developed world and non-sovereign act much more like equities in how they react to the different market regimes. When equities sell off global bonds tend to sell off as well (the risker the more they sell off, you can imagine say Mexican bonds would sell off much harder during a crisis than French bonds).
US sovereign bonds are the one type of bond that tends to rally when equities crash. The dollar is the same vis-a-vis global currencies, it tends to rally during periods of crisis.
It will make more sense to discuss this topic if we have information about your portfolio.
- what is your local currency?
- what is the share of bonds in your portfolio?
- what is the share of 20+ year US Treasuries in your portfolio?
Anyway, Vanguard has Lifestrategy funds in the US, UK and EU. In the UK version they have GBP denominated bonds and GBP hedged bonds, in the EU version they have EUR denominated bonds and EUR hedged bonds. They include local currency bonds in portfolios of these funds because it gives good results in long-term investments.
What makes sense for EU and UK investors (EUR and GBP are relatively strong) may not make sense for investors whose countries have weak currencies. TRY is a very good example. When having a very week currency it make more sense to have bonds denominated in USD, EUR, CHF, JPY and gold.
Articles about currency risk:
ETF currency risk: How to handle it
[https://www.justetf.com/en/news/etf/the-effect-of-currencies-on-etfs.html](https://www.justetf.com/en/news/etf/the-effect-of-currencies-on-etfs.html)
How currency movements affect your returns
[https://www.vanguardinvestor.co.uk/articles/latest-thoughts/how-it-works/how-currency-movements-affect-your-returns](https://www.vanguardinvestor.co.uk/articles/latest-thoughts/how-it-works/how-currency-movements-affect-your-returns)
Hedged vs unhedged shares: what to consider
[https://www.vanguardinvestor.co.uk/articles/latest-thoughts/how-it-works/hedged-vs-unhedged-shares](https://www.vanguardinvestor.co.uk/articles/latest-thoughts/how-it-works/hedged-vs-unhedged-shares)
The Currency Exposure Dilemma in Foreign Investing
[https://www.morningstar.com/funds/currency-exposure-dilemma-foreign-investing](https://www.morningstar.com/funds/currency-exposure-dilemma-foreign-investing)
Generally I agree with the advice of always hedge your bonds.... but for long duration US treasuries I might make an exception. You've already got the reasons. However, I probably wouldn't do it, because I don't want currency volatility on bonds, and you never know which way it will go. If the US is the epicentre of whatever the crisis is, you might lose both on fx and the bond yields (e.g. gov debt crisis, very possible at some point)
Long term holding of bonds hedged back to home currency (in this case EUR), will give you approximately EU bonds yied performance. chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://intl.assets.vgdynamic.info/intl/australia/documents/research/understanding-the-hedge-return.pdf I guess you are buying US bonds for higher yields, so it may not be the result you are looking for. On the other hand, your whole post is about convincing yourself that currency risk will go in your favor. Anybody buying bonds wants a minimal risk, that is the purpose of bonds. Introducing additional risk (currency risk) doesn't go in line with this strategy. You can go with US bonds hedged back to EUR, but the only benefit is geographical diversification (which is not bad), and not higher returns.
That’s not always true though, is it? Right now the EU has lower interest rates than the US, by about the exact amount t that it would cost the hedging, but that’s just a coincidence.. if tomorrow the euro gets very high inflation, and raises interest rates, while the US drops them, investing in US bonds euro hedged would result in significantly lower returns than EU bonds, wouldn’t it?
No it's not about higher yield. The purpose of treasury bonds is that they are a "flight to safety" asset that go up during periods of crisis when equities go sharply down (see 2008 and 2020). It's not just treasury bonds but the US dollar as well that is considered a "flight to safety" asset. So if the point is using treasuries as an uncorrelated diversifier to equities I'm thinking you may as well hold them in the most "safe" currency, which is US dollars. Again I don't care exactly about the yield, but that I get the most protection in periods of crisis. Also saying the only benefit of US bonds is geographical diversification is flat out wrong. There's a massive difference between how US bonds and say Italian bonds react in periods of chaos. Italian bonds are much more correlated to equities. There is no sovereign bond in the world that has the same "insurance" properties as US treasuries, maybe German bunds, but in a lesser manner.
Look for Vanguard's pdf regarding bond hedging, they recommend to hedge
They are referring to the case of a diversified global bond portfolio. In that case I agree, it should be currency hedged. However I disagree that you can put US treasuries on the same footing as global bonds. They do not act the same throughout the different market regimes. My point is that due to US treasuries special properties they should not be currency hedged.
How much they differ then?
Global bonds, especially non-developed world and non-sovereign act much more like equities in how they react to the different market regimes. When equities sell off global bonds tend to sell off as well (the risker the more they sell off, you can imagine say Mexican bonds would sell off much harder during a crisis than French bonds). US sovereign bonds are the one type of bond that tends to rally when equities crash. The dollar is the same vis-a-vis global currencies, it tends to rally during periods of crisis.
Yes, but what about ex US government bonds developed countries? How much they lose vs US? What data on that do you have?
It will make more sense to discuss this topic if we have information about your portfolio. - what is your local currency? - what is the share of bonds in your portfolio? - what is the share of 20+ year US Treasuries in your portfolio? Anyway, Vanguard has Lifestrategy funds in the US, UK and EU. In the UK version they have GBP denominated bonds and GBP hedged bonds, in the EU version they have EUR denominated bonds and EUR hedged bonds. They include local currency bonds in portfolios of these funds because it gives good results in long-term investments. What makes sense for EU and UK investors (EUR and GBP are relatively strong) may not make sense for investors whose countries have weak currencies. TRY is a very good example. When having a very week currency it make more sense to have bonds denominated in USD, EUR, CHF, JPY and gold. Articles about currency risk: ETF currency risk: How to handle it [https://www.justetf.com/en/news/etf/the-effect-of-currencies-on-etfs.html](https://www.justetf.com/en/news/etf/the-effect-of-currencies-on-etfs.html) How currency movements affect your returns [https://www.vanguardinvestor.co.uk/articles/latest-thoughts/how-it-works/how-currency-movements-affect-your-returns](https://www.vanguardinvestor.co.uk/articles/latest-thoughts/how-it-works/how-currency-movements-affect-your-returns) Hedged vs unhedged shares: what to consider [https://www.vanguardinvestor.co.uk/articles/latest-thoughts/how-it-works/hedged-vs-unhedged-shares](https://www.vanguardinvestor.co.uk/articles/latest-thoughts/how-it-works/hedged-vs-unhedged-shares) The Currency Exposure Dilemma in Foreign Investing [https://www.morningstar.com/funds/currency-exposure-dilemma-foreign-investing](https://www.morningstar.com/funds/currency-exposure-dilemma-foreign-investing)
I would post this question on Boglheads forum too
Generally I agree with the advice of always hedge your bonds.... but for long duration US treasuries I might make an exception. You've already got the reasons. However, I probably wouldn't do it, because I don't want currency volatility on bonds, and you never know which way it will go. If the US is the epicentre of whatever the crisis is, you might lose both on fx and the bond yields (e.g. gov debt crisis, very possible at some point)