What drove global government bond performance in a year characterised by changing monetary policy, shifting yield curves and volatile currencies?
To explore these dynamics, we turn to the FTSE World Government Bond Index (WGBI), which measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. The WGBI is a widely used benchmark that currently includes sovereign debt from over 20 countries, denominated in a variety of currencies. The index celebrated its 40th anniversary in January 2026.
Currency effects impacted 2025 global government bond returns
WGBI returns in 2025 reflected movements in global government bond markets and the impact of currency translation for international investors.
For investors with US dollar, euro, yen and pound as their base currency, unhedged returns showed wide dispersion, as gains and losses from foreign exchange movements either added to or detracted from local bond returns: US dollar investors with unhedged exposure to the WGBI saw a positive return of 7.55% during the year, but euro-based unhedged investors registered a decline of 5.18%.
Currency-hedged results were more tightly clustered across base currencies. The comparison underscores how, in a year marked by shifting rate expectations and active currency markets, the decision to hedge or remain unhedged was a meaningful driver of realised WGBI outcomes across different investor perspectives.
FTSE WGBI 1-, 3-, and 5-year USD/EUR/JPY/GBP returns
| USD | EUR | JPY | GBP | |||||
|---|---|---|---|---|---|---|---|---|
| Unhedged | Hedged | Unhedged | Hedged | Unhedged | Hedged | Unhedged | Hedged | |
| YTD* | 7.55 | 3.79 | -5.18 | 1.63 | 7.26 | -0.4 | 0.14 | 3.7 |
| 1 Year | 7.55 | 3.79 | -5.18 | 1.63 | 7.26 | -0.4 | .0.14 | 3.7 |
| 3 Years | 3.19 | 4.18 | -0.05 | 2.11 | 9.29 | -1.2 | -0.58 | 3.74 |
| 5 Years | -3.53 | -0.76 | -2.74 | -2.55 | 4.87 | -4.49 | -3.22 | -1.23 |
Source: FTSE Russell as of December 31, 2025. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Broad US dollar weakness
The US dollar weakened against most currencies over the 12-month period. The euro rose 13.4% versus the US dollar, supported by a more resilient than expected growth outlook in southern Europe and shifting policy expectations, as markets increasingly anticipated less easing from the European Central Bank relative to the Federal Reserve in 2026. The Swiss franc also ranked among the strongest G10 performers, benefiting from its traditional safe-haven role amid elevated geopolitical risks. The Mexican peso outperformed many emerging market peers, supported by strong trade linkages with the US and continued foreign direct investment inflows.
In contrast, the Japanese yen was among the weakest major currencies against the US dollar in 2025. The Bank of Japan raised rates in January 2025 but refrained from further tightening until December, amid tariff uncertainty. The December move was well discounted and did not spark a yen rally. Domestic political uncertainty, the continued attractiveness of US dollar/yen carry trades and limited repatriation by domestic investors kept the yen weaker than interest-rate differentials alone would suggest. Whether this dynamic continues remains a key question for 2026.
FX moves vs usd - 12m
Source: FTSE Russell as of December 31, 2025. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Diverging outcomes at the long end: UK gilts rally, Japanese government bonds lag
In 2025, long-duration government bonds delivered contrasting returns in US dollar terms, with UK 20+ year gilts rising 10.5%, while long-dated Japanese government bonds fell 19.1%.
Gilts benefited from a more supportive policy backdrop as the Bank of England’s rate cuts helped underpin a rally at the long end. Furthermore, although gilt issuance was increased for 2025-26 in the UK budget, long-dated gilt issuance was reduced, helping longer maturities outperform. In US dollar terms, 2025 returns were further supported by a stronger pound.
Japanese government bonds were among the weakest major markets, as expectations for higher issuance and the Bank of Japan’s gradual approach to tightening created upward pressure on yields at the long end. Meanwhile, pronounced yen weakness detracted significantly from US dollar-denominated returns.
YTD USD Returns (%)
Source: FTSE Russell as of December 31, 2025. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Bull steepening in US yield curve
A bull steepening—where yields fall more sharply at the short end of the curve than at the long end—emerged as a defining feature of the US Treasury market in 2025, marking a contrast with the bear steepening seen in 2022–23. As policy easing progressed, yields fell most sharply at the front end, particularly in one- to three-year Treasuries. Yields in the seven- to ten-year sector also moved lower, while declines were more modest further along the yield curve, resulting in a steepening across key curve segments.
This pattern reflected a market environment in which expectations for lower policy rates pulled short-dated yields down more decisively than long-dated ones. At the long end, yields remained more anchored by structural considerations, including elevated Treasury issuance, lingering inflation uncertainty and concerns around fiscal deficits, which limited the extent of the rally.
Uncertainty around the future direction of US monetary policy may also be influencing yield curve dynamics. With questions emerging about the evolution of Federal Open Market Committee decision-making after Chair Jerome Powell’s expected departure in May 2026, term premia at longer maturities have remained relatively elevated, reinforcing the steeper curve profile observed over the past year.
us treasury yield curve spreads since 2021
Source: FTSE Russell and LSEG. All data as of December 31, 2025. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
A year defined by rates, curves and currencies
Global government bond performance in 2025 was influenced by the interaction of monetary policy, yield curve dynamics and significant currency moves, resulting in different outcomes across markets and investor bases. From an index perspective, the year highlights the role of transparent, rules-based benchmarks in helping global fixed income investors examine the effects of rates, duration and currency on government bond performance.
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