Foreign Investors Slash Dollar Hedges to Decade Low as Global Bond Yields Hit Multi-Decade Highs

Foreign investors are betting the dollar stays calm. History says that bet gets expensive fast.

A Bloomberg analysis of pension fund and insurer filings across six markets, including Japan, Canada and Taiwan, found these investors hedged only 41% of their foreign-currency exposure as of June 30. That's the lowest level since at least 2015, according to Bloomberg's calculations, which cover roughly $4.6 trillion in foreign-currency holdings.

When the dollar drops, unhedged foreign holders of U.S. stocks and bonds eat the currency loss on top of whatever else happens to the asset price. Less hedging means more pain if the dollar slides.

And the dollar has been sliding. It's down about 2% this quarter and weaker against most G10 currencies as investors lean into what's being called the "debasement trade." That's the view that U.S. fiscal and monetary policy is eroding the currency's long-term value, according to NDTV Profit's reporting on the Bloomberg data. Treasury Secretary Scott Bessent's efforts to support the yen and hold down U.S. yields have fed that narrative, along with uncertainty over whether Federal Reserve Chair Kevin Warsh will raise rates to fight inflation while President Trump keeps pushing for cheaper borrowing.

Laura Cooper, head of macro credit at Nuveen, which manages $1.4 trillion, told Bloomberg the math doesn't require a dramatic shift to matter. "Given the scale of foreign holdings of US assets, it doesn't take a dramatic change in positioning to matter," Cooper said. "Foreign investors hold a sizeable stock of US assets, so even small shifts in hedge ratios can drive meaningful FX flows."

Bloomberg estimates a five-percentage-point increase in hedge ratios alone would trigger roughly $230 billion in transactions. Japan holds about 10% of all foreign-owned U.S. Treasuries, the single largest chunk in the world. Canada and Taiwan aren't far behind. If any of these players start scrambling to hedge at once, that's not a rounding error.

The Bond Market Is Already Cracking

While currency hedging quietly unwinds, government bond markets are getting hit from a different direction. Reuters reporting carried by Global Banking and Finance Review and TBS News describes a global bond selloff pushing yields to multi-decade highs as of Wednesday, September 2.

Japan's 10-year yield climbed above 3% on Tuesday, a level not seen since 1996. Germany's 10-year Bund yield is at its highest since 2011. Britain's 30-year borrowing costs are at 30-year highs, and its equivalent yield sits at levels last touched in 2008. U.S. 30-year Treasury yields hit their highest since 2007 back in August.

State Street's head of macro strategy, Michael Metcalfe, told Reuters a mix of forces is driving it: oil prices climbing on Middle East tensions, which pushes traders to bet on rate hikes, layered on top of long-simmering worry about government debt loads. "In France and the UK, we are going to get news on budgets soon. So, there are not many positives out there," Metcalfe said.

Add to that a genuinely new pressure: Big Tech's AI spending spree. Five major hyperscalers — Alphabet, Amazon, Meta, Microsoft and Oracle — have issued $220 billion in debt so far this year to fund data centers and AI models, more than double last year's total, according to LSEG data cited by TBS News. That's helped push global corporate bond issuance to a record $4.9 trillion in 2026, up 14% from the same point last year. Nomura's chief macro strategist Naka Matsuzawa said hyperscalers' willingness to pay high rates to raise cash is pulling yields up broadly.

The U.S. national debt has crossed $40 trillion, and debt-to-GDP now sits at or above 100% across every G7 economy except Germany, TBS News reported. Britain's own fiscal watchdog said in March its interest bill, at nearly 4% of output, now exceeds its defense budget and is roughly double the pre-pandemic decade average.

What a Reasonable Skeptic Would Say

Some analysts argue this is a temporary squeeze, not a structural break. Hedging costs were historically expensive, and the dollar's decades-long habit of rising during market stress gave investors a real incentive to skip hedges and let the dollar do the cushioning for them. That approach worked for most of the past decade. If the dollar stabilizes as it has done through the summer, per Bloomberg, unhedged investors face no penalty at all.

But that defense depends on the dollar continuing to behave the way it always has. Saxo's chief investment strategist Charu Chanana told Reuters yields can keep climbing as investors simply demand a bigger premium to hold long-dated government debt. If bond yields and a weakening dollar move together instead of offsetting each other, unhedged foreign holders take a currency loss and an asset-price loss at the same time.

One concrete signal that some official institutions aren't waiting to find out: the Dutch central bank announced this week it has moved billions of dollars worth of gold reserves out of North America, calling it crisis preparedness amid global political unrest, according to Breitbart. Whether that's an isolated hedge or the start of a broader shift among central banks and pension funds is worth watching as markets head into the fall budget announcements in France and the UK.