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Foreign Currency Bonds

Target Shorter-Duration (Sell) / Keep Longer-Duration (Hold)

Matthew Macreadie

Investors buying foreign currency bonds need to appropriately consider the foreign currency risk inherently embedded within their portfolio.

For some investors, especially those with foreign currency assets/liabilities, the risk may be lower as there is a need for foreign currency cashflows. However, many investors do not have appropriate hedges in place for their foreign currency exposure and so are subject to FX risk on their interest and bond principal.

IAM has noted to investors over the last year that adding USD bonds to their portfolio would help in an environment where the AUD depreciates against the USD. As shown below, this dynamic has played out providing many investors with enhanced returns on some USD bonds within their portfolios. Over the past year, the AUD/USD has decreased by over 10%.

The challenge is that some USD bonds held by investors are also exposed to duration or interest rate risk. As a result, these bonds prices could be  negatively impacted given the outlook for rising interest rates and inflation.

Forecasting the AUD/USD is inherently difficult, however, investors wanting to capture the AUD/USD depreciation would do well to realise gains on at least some of their USD bonds. Historically, the AUD/USD has tended to operate in a range of 0.70 and above and very rarely stays below the 0.70 mark.

The best USD bonds to realise gains would be those which are shorter-duration or have less interest rate risk.

Why? The negative impact of duration would have been more than offset by the positive impact of the AUD/USD currency depreciation. Whereas for longer-duration bonds, the negative impact of duration would not have been offset by the positive impact of the AUD/USD currency depreciation.

The tables below show indicative total returns over the last year in AUD terms, accounting for impact of duration and AUD/USD currency deprecation. In the first instance, we list some USD bonds below that investors may look to realise capital gains. All of these USD bonds have 5 years of less to maturity and would be considered shorter-duration. For comparative purposes, the second table shows 2 longer-duration USD bonds which have seen their prices negatively impacted.

Issuer Name Ticker Coupon Maturity Price Change
(1 year) – USD
Total Return (1 year) – USD Total Return* (1 year) – AUD
Mineral Resources MINAU  8.125 1/05/2027 (9%) (2%) 7%
Coronado Finance  CRNAU 10.75 15/05/2026 (5%) 5% 15%
Infrabuild Australia INFRAB 12 1/10/2024 (11%) 2% 8%
Fortescue FMGAU 5.125 15/05/2024 (8%) (4%) 6%
North QLD Export Terminal ADAABB 4.45 15/12/2022 1% 5% 15%

Source: Bloomberg.

Issuer Name Ticker Coupon Maturity Price Change
(1 year) – USD
Total Return (1 year) – USD Total Return* (1 year) – AUD
Newcastle Coal NCIAU  4.7 12/05/2031 (24%) (20%) 10%
Fortescue FMGAU 4.375 1/04/2031 (22%) (18%) 8%

Source: Bloomberg.


  1. We use Bloomberg pricing and assume that investors bought the bonds exactly 1 year ago. Each investors return profile may be different based on timing of purchase and price executed.
  2. Total return includes both price change and income return.
  3. We assume the total return in AUD terms reflects that interest and bond principal has been reinvested at FX rates over the course of the year.

About Matthew Macreadie

Matthew’s current responsibilities include providing credit commentary/views on the bond market and specific credit issuers with the aim of aiding investors to make better risk-return decisions. He is also part of a team of four within the Debt Capital Markets (DCM) team, which provides corporates, financials, property, and infrastructure companies with flexible funding solutions.

Prior to joining Income Asset Management, Matthew spent eight years working as a Senior Credit Portfolio Manager at Aberdeen Standard, where he was responsible for the credit portfolio construction and security selection across a wide range of investment-grade/high-yield, financial and non-financial sectors. Reporting directly to the Head of Australian Fixed Income, he oversaw a team of four and was the team’s ESG specialist.

Matthew has executed 1, 3, and 5-year credit-strategies that have been consistently above benchmark.

Matthew began his career at KPMG working in Auditing and Assurance within the consumer and industrials group and then spent six years at Colonial First State Global Asset Management as a Fixed Income Credit Analyst.

Matthew holds a Masters of Applied Finance degree from Macquarie University and a Bachelor of Commerce degree from UNSW.

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