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    US corporate bonds sink but get expensive with hedging

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    U.S. investment-grade corporate yields more than doubled this year to 4.75%, but with currency hedging (Image: REUTERS/Stringer)

    This was the worst first half on record for US corporate bonds. USAwhich became much cheaper for everyone but a crucial group of investors: European and Asian asset managers.

    Currency protection has become more expensive for euro and yen based investments thanks to the aggressive monetary tightening campaign of the Federal Reserve.

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    For Europeans, these costs are the highest since October 2019.

    US investment grade corporate yields have more than doubled this year to 4.75%, but with currency hedging, they are closer to 2.2% for euro and yen investors.

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    These high costs are unlikely to be reversed anytime soon, according to strategists at the JPMorgan.

    As currency hedging expenses rise, potential returns in other parts of the world also rise, particularly in Europewhere investment-grade corporate bonds yield about 3.3%, according to Bloomberg data.

    It’s a sharp reversal from last year, when in August there was more than $16 trillion in negative-yielding debt globally, and many European and Asian investors turned to US corporate bonds.

    US investment grade bonds have lost about 15% this year. If investors expect Japanese and European pension funds and insurance companies to buy to take advantage of low prices, they could be disappointed, said JPMorgan strategists led by Eric Beinstein and Nathaniel Rosenbaum.

    But there are bright spots for US corporate debt, strategists said, including higher demand from domestic investors and pension funds, as well as lower issuance.

    Not all foreign investors protect purchases. U.S. yields are still often better than those available in Asia, so at least some foreign demand will be there, said Lotfi Karoui, chief credit strategist at the Goldman Sachs.

    “I don’t think foreign demand is going to go off a cliff, but compared to 2020 and 2021, it’s definitely going to be smoother,” he said.

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    Source: Moneytimes

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