Bonds are the safe harbours within a portfolio, meant to reduce overall risk. However, they do not always live up to this function, as investors experienced particularly during the historically poor investment year of 2022. However, a study by Sebastian Dörr shows that such fluctuations are nothing out of the ordinary in global bond investments without currency hedging.

The capital market analyst from HQ Trust calculated the return and volatility of the Bloomberg Global Aggregate Global Bond Index and compared them with the values of its currency-hedged version: Would bond investors have been able to sleep just as soundly in the period from 1999 to April 2023 without currency hedging? Not really, especially with the fluctuations that Sebastian Dörr calculated using the so-called rolling 12-month volatility, there were considerable differences.

  • “Without currency hedging, fixed-income securities sometimes reached volatilities reminiscent of equities. The ‘volatility’ peaked at more than 11%.“
  • “In contrast, the risk with currency hedging usually fluctuated only between 2 and 4%.“
  • “The 7% observed over the past 12 months further illustrate the impacts of the strongest interest rate increases in 40 years.“
  • “In this context, the fluctuations of the hedged variant also exceeded those of the index variant without hedging for the first time.“
  • “Over the period shown, hedging against currency fluctuations would have also paid off in terms of performance: The return was 13% better than the unhedged variant.“