Even the Worst Foreign Bonds Are Beating US | Bonds & Fixed Income

Tilting towards overseas bonds stays a successful strategy for US buyers this yr, based mostly on a set of ETFs by Friday’s close (Aug. 22). The modest gain for a benchmark of US authorities and investment-grade securities has been no match for offshore bond markets in US-dollar phrases.

The prime performer yr to this point: , which is up 13.9%. The rally is way forward of the , which clocks in with a reasonable 4.9% complete return to date in 2025.

Even the weakest overseas bond performer – corporates in rising markets (EMCB) — is outperforming with a 5.9% rally.

A key issue for the offshore rally is the weak US greenback. The is down 9.9% yr to this point. All else equal, a decrease dollar interprets into greater offshore costs after translating into US greenback phrases. Hedging overseas currency risk, in short, has been a hefty headwind this yr for US buyers investing abroad.

The technical profile for the US Dollar Index nonetheless appears bearish, and so the forex tailwind for non-dollar property stays intact.

Federal Reserve Chairman Powell’s dovish feedback final week add one other issue for anticipating that the dollar will keep comparatively weak. The prospect for decrease implies a weaker greenback as the aggressive attract declines on the margins for US yields.

Another dimension is the potential that US inflation may heat up as a consequence of tariffs. “We see a risk that the Fed could make a policy error by cutting just as activity rebounds, with headed to 3%,” analysts at Bank of America wrote in a analysis word.

Misguided or not, Fed funds futures are pricing in a high probability (85%) that the Fed will scale back its goal price at subsequent month’s FOMC assembly (Sep. 17). In flip, the odds nonetheless look low that US bonds will begin to outperform their overseas counterparts in the close to time period.