Do institutional EM bond investors hedge currency risk somehow?

Discussion in 'Fixed Income' started by lentus, Nov 24, 2019.

  1. lentus


    thanks :)
  2. 2rosy


    Yes some do. Some em bonds are issued in usd or euro so currency risk is not an issue
  3. lentus


    I'm talking about local currency issues obv. So how do they hedge? Doesn't the negative carry ruin things?
  4. H2O


    It all depends on what you are looking for. Ultimately you are trading a credit risk (+ FX if you don't hedge).

    For whatever reason I may be looking for that specific credit risk (which may not be available in my base currency), or the spread may be more attractive than in my base currency even after hedging (this happens regularly)

    Edit: to answer your last question: usually by using forwards, although matching exact cashflows may be tricky, particularly if your looking to hedge FRNs)

    Hope this helps
    lentus likes this.
  5. lentus


    so you make sure the negative carry implied by the forward doesn't eat your USD-measured yield from the bonds?
  6. Fxmove88


    Yes, they do. Through hedges in a similarly moving currency against the USD.
    Say you invest in IDR government bonds which offer attractive yields, you can hedge through AUDUSD forwards to curb the movement of USD against IDR, as AUDUSD forwards is cheaper than USDIDR one. It is not a perfect hedge but both IDR and AUD are commodity-linked currencies.
    longandshort likes this.