FIIG - The Fixed Income Experts

News and Education

Why USD bonds are a better currency hedge than US dollars

by Elizabeth Moran | Sep 23, 2014

The Australian dollar has fallen by three per cent in the last two weeks and the ASX200 has dropped by 4.2 per cent over the same period. While there is a whole range of factors driving shares lower – iron ore prices, geopolitical tensions and economic concerns - some of the decline can be attributed to the falling exchange rate.

Wearing my “what if” risk hat; if the Australian dollar corrects and stabilises around 80 cents to the US dollar, what will happen to the ASX200? More importantly, do you have a currency hedge?

One effective hedge is to simply hold US dollars. But with interest rates so low in the US, income will be close to zero.

Bonds issued in US dollars offer an attractive alternative. The world’s largest companies, as well as many mid-sized corporations, issue bonds in US dollars, including many familiar Australian names.

Fortescue Metals is one such company. Fortescue have issued a USD senior unsecured fixed rate bond that ranks behind Fortescue’s secured bank facilities. The bond has eight years until maturity and currently offers a high yield to maturity of 5.64 per cent. For those investors who think interest rates are going to rise in the near term, shorter dated USD bonds could be more appealing. Macquarie and QBE have USD hybrids with an expected maturity of December 2015 and June 2017 paying 1.54 and 4.11 per cent respectively.

Newcrest, which is higher credit quality than Fortescue, has a similar dated bond that offers a lower 5.00 per cent yield to maturity. The better credit quality but lower return provides very good relative value.

There is one other bond that is not issued by an Australian company but considered an attractive asset and that’s by Petrobras. The company is a semi-public Brazilian multinational energy corporation, and is the world’s third largest oil producer and fifth largest oil and gas producer, and second only to ExxonMobil in terms of oil reserves.

All of the bonds listed are fixed rate and the bond prices would likely fall if interest rates rise. The back stop with bonds is that if you hold until maturity you can expect repayment of face value and a positive return on your investment.

If you hold US dollars they could be used to buy the bonds, otherwise you would need to convert Australian dollars into US dollars before you transact. Over the life of the bond, income is paid in regular instalments in US dollars and assuming the company survives, the USD100 face value of the bond is returned at maturity.

Should the Australian dollar fall against the US dollar, and all else remains equal, investors could then sell the bonds, cushioning possible losses elsewhere in the portfolio. Unlike term deposits, bonds are tradeable, can earn higher than expected returns, can add diversity to a portfolio and can hedge currency, higher and lower interest rates and inflation.

Foreign currency bonds take on additional currency risk, over and above the credit quality of the company issuing the bond and are only available to wholesale investors.

Copyright The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced or distributed to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.

Disclaimer Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the company which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice.

No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

FIIG shall not have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.

FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at

An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.

The FIIG research analyst certifies that any views expressed in this document accurately reflect their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.