basic question - currency hedging example
I came across the following paragraph and can't really make sense of it:
Normally, investments in foreign currency securities are hedged to remove the risk of currency fluctuations. The additional cost (or return) from currency hedging can change the attractiveness of bonds, often quite dramatically.
For example, the 10-year German Bund yield at -0.6% appears unattractive for US dollar investors. However, currency hedging rates are based on the difference between US and German short term interest rates and, since US short term interest rates are much higher than in Germany, US investors are effectively paid money to hedge euro exposure. On a currency hedged basis, US investors can earn a yield of 2.2% when investing in German 10 year bonds. This is higher than the 1.6% available on US 10 year Treasuries.
How does it work that a 1.6% yielding investment being heged with a negative yielding investment (-0.6%) leads to a higher yield overall (2.2%)?
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