Robin Marshall, MA, MPhil
Head of FICC Research, FTSE Russell
This research examines the impact of using different FX hedge ratios on WGBI xJpn returns and their volatility, for a yen based investor, since the WGBI was introduced in the 1980s.
Key takeaways:
- Since 2016, a 50–75% hedge ratio minimised volatility, while the unhedged World Government Bond Index (WGBI) ex Japan delivered the strongest risk-adjusted returns.
- Over 1986–2026, a 100% FX hedge ratio does minimise volatility, just, but 50–75% hedging generated stronger returns per unit of risk.
- Hedging costs and currency valuation can pull in different directions, so yen valuation should inform, rather than replace, a risk-based framework.
- 10 year JGB yields now exceed hedged 10 year US Treasury yields for yen-based investors.
Points of differentiation:
- Combines strategic risk-based hedging analysis with a tactical currency-valuation perspective.
- Compares five hedge ratios across the full 1986–2026 period and the 2016–2026 and 2022–2026 sub-periods.
- Links WGBI ex Japan outcomes with Japanese US Treasury holdings, hedging costs and Purchasing Power Parity (PPP).
- Demonstrates that the hedge ratio that minimises volatility may differ from the hedge ratio that maximises risk-adjusted returns.
- Explains the risks in a disorderly unwind of the yen carry trade.
What does our research mean for investors?
Research results indicate that the volatility-minimising hedge ratio and the hedge ratio associated with the strongest historical risk-adjusted returns have differed across periods. The analysis also highlights that hedging costs, currency valuations, investment objectives and market conditions may influence the outcomes associated with different hedge ratios.
