International Bonds Outshine U.S. Benchmarks in 2025, Fueled by Weak USD — Evening Brief – 05.15.25
After years of limited investor appetite for global bond diversification, 2025 is proving to be a turning point. Year to date, fixed-income securities outside the U.S. are significantly outperforming the domestic investment-grade bond benchmark, as reflected in a set of ETFs, driven by a weakening U.S. dollar and shifting global economic dynamics.
Foreign inflation-indexed government bonds are the top-performing sector in the global bond market. The SPDR FTSE International Government Inflation-Protected Bond ETF (WIP) has gained 7.6% this year, far exceeding the 1.5% rise in the U.S. bond benchmark, represented by the Vanguard Total U.S. Bond Index (BND).
Close behind, short-maturity foreign government bonds in developed markets (BWZ), foreign corporates (PICB), and emerging markets government bonds (EMLC) each rose around 7%. The weakest-performing foreign bond segment—high-yield bonds from emerging markets (HYEM)—has still managed a 2.1% increase, surpassing the BND’s 1.5% gain.
A primary driver of these gains is the U.S. dollar’s decline, making unhedged foreign currency exposure advantageous. The Vanguard Total International Bond Market ETF (BNDX), which hedges forex risk, has seen only marginal increases. “My thesis is that the U.S. dollar is about to get knocked down a couple pegs,” said Harvard economist Ken Rogoff, author of Our Dollar, Your Problem. “It will still be first in global finance, because nothing is poised to fully replace it. The dollar just won’t be as unique as it once was.”
Athanasios Vamvakidis of Bank of America echoed this sentiment, noting a potential regime shift: “I don’t think we go back to where we were because I think the rest of the world has crossed a red line, and they will try to reduce dependence on the U.S. on trade, on defense and everything.”
If Rogoff and Vamvakidis’ analysis holds, foreign bond performance may just be getting started, offering investors new diversification opportunities as the dollar’s global dominance evolves.