The historical performances of hedged versus unhedged foreign bonds show that currency hedging can substantially reduce the volatility of foreign bonds and foreign bond portfolios, while having little effect on their returns. When held hedged, all the foreign government bonds examined (with the exception of Canadian bonds) were less volatile than their U.S.-dollar counterparts. Furthermore, hedging improved the bonds’ return/risk ratios.

Hedged foreign bonds performed better than unhedged bonds as diversification vehicles for a U.S. fixed income investor. While unhedged foreign diversification offered U.S. investors higher returns than U.S. Treasuries, it was also riskier. Unhedged foreign bond portfolios fluctuated dramatically, sometimes outperforming U.S. Treasury bonds and sometimes doing much worse, depending on how the U.S. dollar performed. The hedged diversified portfolios were consistently less risky than U.S. Treasuries alone and consistently more stable than a portfolio of unhedged foreign bonds.