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Turning a Negative Into a Positive: Finding Yield Where There Is None Through Currency Hedging

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Insights and Market Perspectives

Turning a Negative Into a Positive: Finding Yield Where There Is None Through Currency Hedging

Author: AGF Fixed Income Team

November 6, 2019

The amount of negative-yielding debt has been piling up so far this year and could reach new highs if central banks around the world continue to cut interest rates and ease monetary policy further in the coming months.

But that doesn’t mean investors should be resigned to a growing pool of bonds with yields that necessarily earn less than nothing. In fact, with the right currency hedging strategy in place, many of today’s negative rates can still result in positive returns.

Source: Bloomberg L.P. as of October 31, 2019. Totals calculated using the Bloomberg Barclays Global Aggregate Bond Index

This is particularly true of those hedging back to the currency of a country that has a domestic bond market with a favourable interest rate differential compared to another nation’s bond market.

Take for example, the scenario of a Canadian investor who is considering the purchase of a German bund. A euro-denominated 10-year bund yields around -0.40% , while the yield on a Canadian-dollar-denominated Canada 10-year bond is closer to 1.5%. Because this differential is expressed in the foreign exchange market between the two currencies, it’s possible for this investor to buy the 10-year German bund hedged back to Canadian dollars and earn around 1.9% (calculated based on a 3-month F/X forward contract).

In other words, the investor would earn more from a bond, which on the surface is earning a negative yield, than they would by simply owning the Canada 10-year bond equivalent in their home currency. And this isn’t an isolated case. The same shift from negative to positive yield would also be true to varying degrees for an investor who hedged the same German bund in U.S. dollars or the currency of any other nation boasting a favourable—and sufficient enough—interest rate differential.

Of course, this works in reverse as well. A U.S. 10-year Treasury, which yields roughly 1.7%, would earn only 1.4% for an investor who hedged it back in Canadian dollars because of the extent the interest rate differential is currently in favour of the U.S. Treasury market over Canada’s.  

It’s also important to remember that interest rate differentials are constantly changing and won’t always work in the same favour or to the same degree as they may have previously. U.S. Treasury rates, for instance, could fall from current levels and close the gap with other countries if the U.S. Federal Reserve cuts rates further.

Ultimately, a currency hedging strategy that takes these differentials into account can help investors navigate today’s bond market and even find yield where it seems there is none.


The commentaries contained herein are provided as a general source of information based on information available as of October 31, 2019 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments LLC (formerly FFCM, LLC), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

™ The ‘AGF’ logo is a trademark of AGF Management Limited and used under licence.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

© 2022 AGF Management Limited. All rights reserved.

Written by

AGF Fixed Income Team

AGF Fixed Income Team

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