By Gavekal Capital Blog
Back in September, we explained how US treasury yields were at parity with foreign government bonds for many foreign investors (namely euro and yen-based investors) from a currency hedged basis. The fairly violent backup in yields over the past week has again given foreign investors a reason to buy US treasuries even as the the cost of currency hedging has increased.
For euro-based investors, the 10-year US treasury yield on a currency hedged basis is 57 bps while a 10-year German bund is yielding 31 bps. One month ago the currency hedged yield was just 15 bps. The cost to hedge the currency has increased to 169 bps which is the most expensive it has ever been to hedge against the dollar for a euro investor going back to 2008.
For yen-based investors, the 10-year US treasury yield on a currency hedged basis is up to 55 bps while a 10-year JGB has a negative yield of -2 bps. On 9/29, a 10-year JGB actually had a higher (negative) yield at -9 bps than a currency hedged 10-year US treasury (-13 bps). The cost to hedge the currency has increased to 171 bps which is the second most expensive level since 2008.