As the U.S. Dollar Index hits four-year lows, a sharp dichotomy is emerging in global finance: President Donald Trump is celebrating the greenback’s slide, while foreign investors in U.S. fixed income are facing guaranteed losses.
The End Of The ‘Free Lunch’
New data from PIMCO reveals that the long-standing era of attractive yields for foreign buyers of U.S. Treasuries has officially ended. For decades, global investors enjoyed a “free lunch,” gaining a yield pickup by buying US debt over domestic options.
However, amid ongoing dollar depreciation, the cost to hedge currency risk has soared, destroying those returns.
According to PIMCO's analysis, hedging U.S. fixed income back into local currency now locks in negative yields for investors in major markets like Japan, Germany, France, and the UK compared to their domestic risk-free rates.
Japanese investors, for example, face a hedged yield of roughly -1.2%, as per the chart shared by PIMCO.
For decades, foreign investors enjoyed a free lunch: U.S. Treasuries offered attractive yields while the U.S. dollar provided natural equity hedging. That era is over. Amid ongoing dollar depreciation, hedging U.S. fixed income often locks in negative yields for investors abroad,… pic.twitter.com/r2JqTEfeJG
The rising hedging costs coincide with President Trump’s vocal support for a weaker currency to boost American manufacturing competitiveness against China and Japan.
With the dollar down approximately 10.7% since Trump took office, increased volatility has made the protection foreign bond buyers need prohibitively expensive.
While global inflows into U.S. equities remain strong, fixed-income allocations are becoming increasingly selective as the math no longer works for foreign institutions.
Sell Assets, Not The Currency
Despite the dollar's weakness—and alternative assets like Gold nearing $5,600—market veterans caution against betting on a total currency collapse.
Investor Campbell argues that “dollar doomers are missing the point,” suggesting that the global financial system still fundamentally operates on dollars.
The real risk, Campbell posits, isn’t the currency itself dying, but a forced liquidation of the trillions in U.S. stocks and bonds held by foreigners reluctant to swallow negative returns.
His playbook for this environment: short the assets foreign investors own, like Treasuries, but keep the cash.
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