[Verse 1] When you invest in bonds across the sea Different currencies create complexity A dollar bond in Europe, yen in the States Currency risk determines your bond's fate You want to hedge that risk away But the basis spread is here to stay [Chorus] Cross-currency basis, it's not zero anymore LIBOR plus basis, that's what swaps are for Dollar shortage overseas makes the basis wide Hedged returns will differ from what you thought you'd find Basis, basis, drives the cost of hedge Basis, basis, puts returns on edge [Verse 2] Let's say you buy a German corporate bond Euro denominated, five years long You're based in dollars, want to hedge currency Enter the cross-currency swap, your remedy Pay euros, receive dollars in the trade But basis means the perfect hedge can't be made [Chorus] Cross-currency basis, it's not zero anymore LIBOR plus basis, that's what swaps are for Dollar shortage overseas makes the basis wide Hedged returns will differ from what you thought you'd find Basis, basis, drives the cost of hedge Basis, basis, puts returns on edge [Bridge] Post-crisis world changed everything we knew Regulation made banks more careful too Dollar funding costs rose around the globe Arbitrage can't close the gap, here's what you need to know [Verse 3] Your hedged return equals the foreign yield Plus the basis that the swap will yield If basis is negative, your return drops down Even with perfect hedge, you'll lose some ground International bonds need careful thought The basis matters more than what you bought [Chorus] Cross-currency basis, it's not zero anymore LIBOR plus basis, that's what swaps are for Dollar shortage overseas makes the basis wide Hedged returns will differ from what you thought you'd find Basis, basis, drives the cost of hedge Basis, basis, puts returns on edge [Outro] Remember basis when you hedge your bet International bonds aren't risk-free yet Currency hedged but basis risk remains That's the cost of global investment gains
← International Bonds and Currency Hedging | Yield Curve Strategies: Bullet, Barbell, and Ladder →