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Written by: John Taylor, Nicholas Sanders, and AJ Rivers
Tariff turmoil and trade tensions are fueling market volatility and raising new doubts about the US dollar and US Treasuries as safe-haven assets. We believe bond investors looking to stem tariff-driven portfolio volatility may find compelling opportunities—and higher income potential—outside the US.
Investor concerns about US exceptionalism aren’t new—but they’re mounting. Confusing tariff announcements, contentious trade talks, rising protectionism and the threat of new taxes on foreign investors are adding to market uncertainty. At the same time, the recent US credit downgrade, a weakening dollar and proposals to extend deficit-expanding tax cuts are prompting fresh scrutiny of US creditworthiness.
In our view, one antidote to this uncertainty may be to shift from a US-only bond strategy to a hedged global fixed-income strategy.
The Benefits of a Larger Opportunity Set
Going global dramatically expands the opportunity set. While the US bond market is the world’s largest, it constitutes just 40% of the global bond universe. By shifting to a global strategy, investors gain access not only to a broader range of issuers, credit profiles and yield curves across regions and sectors but also to a wider mix of credit sectors—including sovereign and corporate bonds, investment grade and high yield, and securitized assets such as residential and commercial mortgages.
This expansion goes beyond mere scale. Different countries operate under distinct economic, monetary and inflation regimes—offering uncorrelated return streams and alternative sources of income and risk. These differences can improve diversification and help investors better navigate shifting market conditions.
For active managers, this broader landscape often offers not just different but better opportunities to generate income and excess return. Regional differences in inflation, growth and policy cycles can lead to diverse market dynamics—and in many cases, more attractive valuations or higher hedged yields than those available in the US. This added flexibility gives active managers more levers to pull in pursuit of alpha.
Hedged Global Bonds: Historically Higher Returns, Lower Risk
One of the biggest challenges facing US investors is how to reduce volatility without sacrificing return potential. This is where global bonds hedged to the US dollar can shine. Over the past four decades, hedged global bonds have captured 86% of the gains from US bond-market rallies. But when US bonds sold off, hedged global bonds experienced just 65% of that downside (Display).
Underscoring the global bond market’s relative stability in diverse conditions, hedged global bonds have consistently exhibited lower volatility than US bonds over the past 30 years (Display).
Hedged global bonds have outperformed US bonds in the process. Over the 30 years ending May 31, 2025, the Bloomberg Global Aggregate Index (hedged to US dollars) returned 4.7%, versus 4.4% for the Bloomberg US Aggregate Index, on an annualized basis.
A global approach to fixed income can also help buffer equity market turbulence. Although both US and hedged global bonds have historically shown low or negative correlations to the S&P 500, the global strategy has proved especially resilient during periods of high US equity volatility.
In months when US stocks fell by more than one standard deviation, the correlation of hedged global bonds to stocks fell to –0.17, versus the –0.10 negative correlation of US bonds with stocks. In other words, hedged global bonds have historically offset US equity volatility more effectively than a US-only bond strategy.
Elevated Yields Create a Window for Global Income
Many central banks have slowed the pace of monetary easing, helping to keep global yields elevated. For US investors, hedging global bonds to the dollar can further boost those yields—at times exceeding what’s available in the US.
Higher yields do more than provide more income. They also help offset price declines that result from rising rates and widening spreads, providing a cushion in more volatile markets. In the case of 10-year government bonds, a hedging strategy can add 100 basis points or more to yields in developed markets (Display).
Today’s opportunity set is especially compelling. If global demand for US Treasuries declines and capital shifts toward smaller markets, the resulting drop in yields could lift bond prices in those markets—creating a tailwind for returns.
US Bonds Still Matter in a Global Strategy
Taking a global approach to fixed-income investing doesn’t mean forsaking US bonds. The US is still a key component of the global bond market, and active managers will allocate capital where risk-adjusted returns appear most attractive. At times, that may mean leaning into US bonds; at other times, focusing beyond it.
With volatility still high and US exceptionalism in question, we think investors should consider ways to manage through bond-market uncertainty. In any market—and especially today—we believe a hedged global approach provides more opportunities to diversify risk, add alpha and generate income than a US-only bond strategy, while also delivering critical ballast in turbulent times.
Related: Is Your Fixed-Income Manager the Real Deal? 7 Key Questions to Find Out