US Bond Market Lags Foreign Fixed Income Amid ETF Gains

US investors have seen a modest gain in the US bond market this year, but foreign bonds have performed better. The US bond market has trailed foreign fixed income, with some ETFs showing a winning strategy for investors.

US investors have experienced a modest gain in the US bond market this year, but foreign bonds have outperformed significantly. According to data from ETFs through Friday’s close (Aug. 22), the US bond market has trailed its foreign counterparts, with some ETFs showing a winning strategy for investors [1].

The top performer year to date has been government bonds issued by emerging markets governments (EMLC), which have seen a 13.9% total return so far in 2025. In contrast, the US bond market proxy (BND) has clocked in with a moderate 4.9% total return. Even the weakest foreign bond performer, corporates in emerging markets (EMCB), has outperformed with a 5.9% rally.

A key factor contributing to the offshore bond rally is the weak US dollar. The US Dollar Index has declined by 9.9% year to date, making offshore prices more attractive when translated into US dollar terms. This weak dollar trend is expected to continue, given the technical profile of the US Dollar Index and the dovish comments from Federal Reserve Chairman Powell [1].

The potential for higher US inflation due to tariffs adds another dimension to the bond market dynamics. Analysts at Bank of America have noted that there is a risk that the Fed could make a policy error by cutting rates just as activity rebounds, with inflation headed to 3%. Fed funds futures are currently pricing in an 85% probability that the Fed will reduce its target rate at the next FOMC meeting on Sep. 17 [1].

In the cryptocurrency market, there has been a significant shift in institutional demand between Bitcoin and Ethereum ETFs. Bitcoin ETFs have seen heavy outflows, with nearly $1.3 billion drained in a six-day streak between Aug. 19 and Aug. 22. This outflow aligns with Bitcoin’s cooling spot market, where BTC slid from $114,300 on Aug. 20 to $111,600 by Aug. 25 [2].

In contrast, Ethereum ETFs have seen inflows, with $287.6 million and $337.7 million in inflows on Aug. 21 and Aug. 22, respectively. This capital rotation mirrors Ethereum’s price performance, with ETH surging from $4,225 on Aug. 21 to peak intraday near $4,883 on Aug. 22. The divergence in flows suggests that investors might be reallocating within the crypto asset class rather than exiting altogether [2].

In summary, while the US bond market has shown modest gains, foreign bonds have outperformed significantly. The weak US dollar and potential inflation risks are contributing factors. In the cryptocurrency market, there is a notable shift in institutional demand between Bitcoin and Ethereum ETFs, with Ethereum ETFs seeing inflows while Bitcoin ETFs experience outflows.

References:
[1] https://www.capitalspectator.com/us-bond-market-continues-to-trail-foreign-fixed-income/
[2] https://cryptoslate.com/insights/six-day-outflow-streak-hits-bitcoin-etfs-eth-turns-positive/