For ever-increasing numbers of investors, US dollar bonds are attractive portfolio components. The yield advantage could be a major reason for this. The interest differential between US Treasuries and 10-year federal bonds, around 2%, is close to the record high seen at the end of 2016. The size of the market and liquidity are other important factors in favour of US dollar-denominated securities. The global corporate bond segment, for example, now has a total volume equivalent to over eight trillion US dollars. Securities denominated in US dollars account for the largest proportion of that, around five trillion US dollars, and are steadily growing.
Evolution of the volume and proportion of USD corporate bonds within global corporate bond market
From corporate bonds and treasuries to emerging market bonds denominated in US dollars, a broad range of indices with sufficient market size is available to investors in the US dollar zone. US Treasuries, corporate bonds and secured bonds constitute more than 80% of the entire US dollar bond market. However, because of the size of the overall market, other segments are still large enough to offer diversification benefits and differing risk/return profiles.
It comes as no surprise, therefore, that investors in low-interest-rate currencies are increasingly turning to USD bonds. In 2017, inflows from European investors into ETFs in US government and USD-denominated emerging market bonds were considerably higher than those into equivalent Euro-denominated products. However, investors should keep an eye on the associated risks. In a narrower sense these include credit risks, e.g. in respect of issuers in the emerging markets, selection risk in each segment, and currency risks ensuing from possible variations between the home currency and the US dollar.
One aspect is currently of particular interest for investors. In recent years, the yield structure of investment grade USD corporate bonds has changed considerably. The credit spread between corporate bonds and US Treasuries now makes up almost half the total yield. This means that, compared with government bonds, US corporate bonds are currently attractive for investors seeking interest-bearing investments. Ten years ago, this yield differential was smaller. Focusing on the credit spread element is therefore decisive in the quest for returns. Credit spreads should be assessed as components of the long-term income available to investors, even after the costs of currency hedging.
However, this depends on investors making a careful choice about the appropriate segments of the US dollar bond market. Various configurations can be considered for different groups of investors, dependent on their risk tolerance and investment horizon. For instance, there are considerable differences between the risk/return profiles of corporate bonds with an investment rating and government bonds from emerging markets. The same applies to the difference between government bonds from emerging markets and high-yield corporates. Investors in corporate bonds can expect marketcapital-weighted spreads of around 120 basis points, with an average rating of A-. On the other hand, emerging market government bonds offer spreads of around 280 basis points, while high-yield corporate bonds feature spreads as high as 360 basis points – but at the price of a significantly higher credit risk profile.
Deutsche Asset Management
With EUR 702 billion of assets under management (as of December 31, 2017), Deutsche Asset Management¹ is one of the world’s leading investment management organizations. Deutsche Asset Management offers individuals and institutions traditional and alternative investments across all major asset classes.
¹Deutsche Asset Management is the brand name of the Asset Management division of the Deutsche Bank Group. The respective legal entities offering products or services under the Deutsche Asset Management brand are specified in the respective contracts, sales materials and other product information documents.
Investors should note that the Xtrackers UCITS ETFs1 are not capital protected or guaranteed and investors should be prepared and able to sustain losses of the capital invested up to a total loss.
Shares in Xtrackers UCITS ETFs which are purchased on the secondary market cannot usually be sold directly back to the relevant fund. Investors must purchase and redeem such shares on the secondary market with the assistance of an intermediary (e.g. a market maker or a stock broker) and may incur fees for doing so (as further described in the applicable prospectus). In addition, investors may pay more than the current net asset value of a share in a Xtrackers UCITS ETF when buying shares on the secondary market, and may receive less than the current net asset value when selling such shares on the secondary market.
Investments in funds involve numerous risks including, among others, general market risks, credit risks, foreign exchange risks, interest rate risks and liquidity risks. The value of an investment in a Xtrackers UCITS ETF may go down as well as up and investors may not get back the full amount of their original investment.
 As at the end of January 2018, source: Bloomberg
 Passive Insights: USD Bonds – A Strategic Beta Toolkit, Deutsche Asset Management, June 2017
 Passive Insights: USD Bonds, op. cit.
 Passive Insights: USD Bonds, op. cit. Spread information as at 31.12.2017