Recent Strengthening of the Taiwan Dollar Poses Dual Losses for Investors Holding U.S. Treasury Bond ETFs
Recently, the rapid appreciation of the Taiwan dollar has severely impacted Taiwanese investors who hold U.S. Treasury bond ETFs denominated in U.S. dollars, exposing them to both exchange rate losses and declines in bond prices. This situation highlights the unique structure of Taiwan’s ETF market.
(Previous Context: U.S. Stock Bitcoin Profits “Repatriated to Taiwan with a 5% Tax”! Trump Proposes New Legislation: Tax on Transfers by Non-U.S. Citizens)
(Background Supplement: U.S. Treasury Bonds Lose AAA Rating – Several Taiwanese U.S. Treasury Bond ETFs Plummet to New Lows, How Will This Affect the Market?)
Impact of Rapid Appreciation of the Taiwan Dollar
The recent sharp appreciation of the Taiwan dollar has had a significant impact on Taiwanese investors who previously invested heavily in U.S. Treasury bond ETFs. Investors are not only facing losses from the decline in bond prices but are also experiencing erosion of returns due to exchange rate fluctuations, resulting in a double whammy.
According to Zhang Shengyuan, Deputy General Manager of the Fixed Income Department at China Trust, after accounting for nominal bond losses and foreign exchange losses caused by the appreciation of the Taiwan dollar, Taiwanese investors are expected to incur average losses of about 11-12% by May 2025. Taking the largest Yuanta U.S. Government 20-Year and Above Bond ETF as an example, its value has evaporated by 13% since early April, primarily due to exchange rate changes. If we count from the start of the Federal Reserve’s interest rate hike cycle, this fund has declined by nearly one-third since its inception in early 2017.
This wave of decline sharply contrasts with the previous report from The Economist, which indicated that the Taiwan dollar is undervalued by 58.8%, creating a strong disparity against the backdrop of investors’ expectations leading to a massive influx into overseas assets.
Large ETF Market and “Treasure Island Bond ETFs” as Catalysts
According to the Financial Times, the unique financial ecosystem in Taiwan is a key factor magnifying this impact. Taiwan possesses one of the largest ETF industries in the world, with total assets expected to reach $196 billion by the end of 2024, accounting for 66% of the total assets in investment funds, which amounts to nearly $8,400 per capita, with a significant proportion attributed to bond ETFs.
To circumvent restrictions on foreign issuers issuing U.S. dollar bonds in Taiwan (i.e., “Treasure Island Bonds”), Taiwanese investment firms have developed “Treasure Island Bond ETFs.” These ETFs, listed in Taiwan and investing in U.S. dollar bonds, are regarded as local stocks, thus avoiding holding restrictions and attracting investors ranging from institutional entities to retail investors seeking higher U.S. dollar interest rates.
Data shows that from 2019 to January 2025, Taiwanese investors injected $73 billion into U.S. bond ETFs (data source: Morningstar), primarily concentrated in government bonds with maturities over 20 years and long-term corporate bonds. As of the end of March this year, the overall value of Taiwan’s fixed income ETF industry (including domestic investments) stood at $94 billion (data source: Morningstar).
Double Impact from Exchange Rates and Interest Rates
This round of losses stems from the decline in bond prices due to interest rate hikes by the Federal Reserve and foreign exchange losses caused by the strong Taiwan dollar. BlackRock’s strategic analysis along with Morningstar indicate that the recent strength of the Taiwan dollar may be a precursor to broader changes in the global currency market. Geopolitical tensions and U.S. trade policies have also exacerbated fluctuations in the Taiwan dollar. Additionally, the reduction in investments in U.S. Treasury bonds by foreign central banks and sovereign wealth funds may increase volatility in the U.S. Treasury bond market.
There are already signs that Taiwanese investors are selling off U.S. fixed income assets. According to Morningstar’s analysis, approximately $1.1 billion flowed out in total during February and March 2025. Although the data for April is not yet complete, covering only one-eighth of Taiwan’s bond ETFs, net outflows have already reached $1.1 billion, indicating that capital withdrawal has accelerated before the significant fluctuations in the Taiwan dollar in May.
This significant volatility in U.S. Treasury bonds has resulted in substantial short-term losses for investors, highlighting the single risk faced by retail investors in Taiwan.
