FIIG - The Fixed Income Experts

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Foreign currency bonds deliver windfall to investors

by Alen Golubovic | Oct 07, 2014

Over the past year, owners of some unhedged foreign currency bonds have received substantially higher returns than owners of equivalent domestic bonds due to the appreciation of the US dollar and British pound against the Australian dollar. This has resulted in the bonds delivering a higher income stream, because their foreign currency coupons are now worth more in Australian dollars, and a potential capital gain. 

This week, we look at how three different foreign currency bonds have performed over the last 12 months on a total return basis. For an Australian investor taking an unhedged foreign currency exposure, the total returns on foreign currency bonds are made up of the following three components:

  • Income return – the return received from the regular coupon income
  • Capital price movements
  • Movements in foreign currency

Please note that the past performance of these bonds is not a reliable indication of future performance, and foreign currency bonds are currently only available to wholesale investors.

If you expect continued strengthening in these foreign currencies, then now is a good opportunity to invest in foreign currency bonds.

1. Ausdrill - 6.875% November 2019 US dollar bond

The table below provides a breakdown on the returns of the Ausdrill 2019 bond over the past 12 months:

Ausdrill, a high yielding US dollar bond, delivered an overall 14.4% return to Australian investors (unhedged) over the past 12 months. Ausdrill’s capital price fell over the period however most of the capital losses have been subsequently recouped. Being a high yielding bond, Ausdrill delivered a high coupon return and combining this with the foreign currency gains has resulted in strong total investor returns. Please note that Ausdrill is a sub investment grade bond with exposure to the commodity sector, and as such suits investors with a higher risk/return appetite.

2. Newcrest – 4.2% October 2022 US dollar bond

The table below provides a breakdown on the returns of the Newcrest 2022 bond over the past 12 months:

Newcrest, an investment grade US dollar bond, delivered a very healthy 20.0% return to Australian investors (unhedged) over the past 12 months. These returns were achieved through a combination of income, price growth and the strengthening of the US dollar. Note that, being a gold mining company, Newcrest is heavily exposed to the commodities sector.

3. IAG – 5.625% December 2016 GBP Bond

The table below provides a breakdown on the returns of the IAG 2016 British pound bond over the past 12 months:

IAG, a British pound bond, has delivered a solid 13.5% total return to Australian investors (unhedged) over the last 12 months. The returns reflect a combination of both income return and a strong pound relative to the Australian dollar, while capital price has remained reasonably steady. Please note that the IAG bonds are subordinated debt instruments which rank below the senior debt obligations of IAG.

FIIG currently has a range of foreign currency bonds available to wholesale investors, across the US dollar, Euro and pound currencies. Please contact your FIIG representative if you are interested in investing in foreign currency bonds.

All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities.

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