Hedging Without the Drag: A Smarter FX Strategy for Global Bond Investors

Allianz Global Investors’ July 2025 report, led by the risklab team, introduces a dynamic FX overlay solution to help fixed income investors manage rising currency hedging costs without compromising risk control.

• Yield premiums erased: Fully hedged U.S. bond exposure offers near-zero or negative yield advantages for euro, UK, and Japanese investors, due to costly forward contracts.

• Dynamic hedge ratio matters: Active hedge management can balance cost and risk, outperforming static 100% hedges in most scenarios.

• FX Overlay strategy works: AllianzGI’s collar-based approach reduced hedging costs by 50–60% over 3–5 years while maintaining risk-adjusted returns.

How can dynamic currency overlays enhance global bond strategies amid FX volatility? The full paper explores implementation and portfolio impact in detail.