As the greenback crawls through one of its worst first-half performances in decades, investors are seeking both yield and shelter in global fixed income markets.
The U.S. dollar has been under pressure, dragged down by increasing political uncertainty, lower-than-expected economic data, and a growing consensus for several Fed rate cuts this year.
The U.S. Dollar Index (DXY) dropped around 11% over the last six months, its sharpest decline since 1991. Although the fall of the dollar initially feels like bad news, it’s secretly laying the groundwork for global bond markets to make a comeback.
Also Read: Dollar’s Biggest Crash In Decades: These 7 Stocks Could Win Big
The Macro Math
As U.S. interest rates decrease, yields on home-country bonds drop, making them less attractive compared to their foreign brethren. At the same time, a weakening dollar increases the value of foreign interest payments converted back into U.S. dollars. The pair creates fertile soil for foreign fixed-income ETFs, especially hedged foreign ones.
And that’s just where a select group of strategic ETFs steps in:
iShares International Treasury Bond ETF (NASDAQ:IGOV): This ETF offers exposure to non-U.S. developed market governments, such as those of Japan, France, Germany, and the U.K. Importantly, it targets sovereign debt of highly rated nations, providing a vehicle for investors to diversify their bond holdings outside of the U.S. Treasury market.
- Top Holdings: Japanese Government Bonds, French OATs, and U.K. Gilts
- Currency Exposure: Unhedged, with potential gains from foreign currency appreciation
- Why Now: Foreign currency-denominated debt can benefit from valuation tailwinds with the dollar on the backfoot
- Expense Ratio: 0.35%
- IGOV is very attractive when global central banks are out of phase with the Fed, or when the dollar weakens and inflation is contained abroad. The fund gained more than 12% in H1.
Vanguard Total International Bond ETF (NASDAQ:BNDX): This ETF is a currency-hedged, income-focused investment. For those investors seeking international exposure but wanting currency volatility kept at arm’s length, BNDX is an attractive solution. BNDX invests in non-US investment-grade bonds, with a blend of sovereign and corporate issuers, while actively hedging currency risk.
- Key Holdings: Bonds issued by Japan, France, Germany, and the U.K.
- Currency Strategy: Fully hedged to the US dollar
- Why Now: In a declining-rate, high-volatility FX world, BNDX can provide stable income with reduced risk
- Expense Ratio: 0.07% — one of the lowest in its category
- Hedging by BNDX will keep you safe from the dangers of euro and yen whipsawing your returns—best for risk-averse income investors.
The Bigger Picture
With investors increasingly doubting the dollar’s longer-term resilience and the Fed set to loosen policy again, perhaps now is the moment to turn to the rest of the world for fixed income.
Hedged (such as BNDX) or unhedged (such as IGOV), international bond ETFs offer a means of enhancing yield potential, diversifying away from U.S. credit risk, and capitalizing on evolving global macroeconomic trends.
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