So the first thing to understand about US investors buying bonds in other currencies is interest rate parity.

Interest rate parity is a no-arbitrage condition representing an equilibrium state under which investors will be indifferent to interest rates available on bank deposits in two countries. Surprisingly this condition does not always hold and creates arbitrage opportunities for FX traders. Covered interest arbitrage is an arbitrage trading strategy where traders capitalize on the interest rate differential between two countries by using a forward contract to cover exchange rate risk.

Forward exchange rates for currencies are exchange rates at a future point in time, as opposed to spot exchange rates, which are current rates. An understanding of forward rates is fundamental to interest rate parity, especially as it pertains to arbitrage (the simultaneous purchase and sale of an asset in order to profit from a difference in the price).Forward rates are available from banks and currency dealers for periods ranging from less than a week to as far out as five years and beyond. As with spot currency quotations, forwards are quoted with a bid-ask spread. The difference between the forward rate and spot rate is known as swap points. If this difference (forward rate minus spot rate) is positive, it is known as a forward premium; a negative difference is termed a forward discount.

A currency with lower interest rates will trade at a forward premium in relation to a currency with a higher interest rate. For example, the U.S. dollar typically trades at a forward premium against the Canadian dollar; conversely, the Canadian dollar trades at a forward discount versus the U.S. dollar.(Investopedia).

So due to interest rate parity, a currency with lower rates trades at a higher exchange rate in the future. Since we are talking about Euro bonds, if you look at EURUSD , the 1 year implied forwards exchange rate is higher that the spot exchange rate. So if you buy a Germans bund at negative yields and then hedge your FX risk by selling the euro currency forward to convert the proceeds over the horizon into dollars, then you are selling the forward exchange rate at a higher price than the spot exchange rate , so the difference between the forward exchange rate and the spot exchange rate can be considered “additional yield” that you are gaining from the hedge.

So obviously this works if you think cross currency basis and exchange rates are stable. If exchange rates move then it will change the hedge back yield. Currently 10 year German bunds that are -30bps will get you a hedge back yield of around 1.82%. This is lower than 10 year US rates (2.04%). A while back a -25bp German bund was getting you 3% 10 year US yields! 2 year yields are currently -7bps to 1.76% which is close to 1.8% US.

Here is the page on BBG where you can calculate the hedge back yields :

None of this is financial advice and I don’t want you guys buying negative yielding bonds or trying to do covered fx arbitrage. This is educational. You can google covered FX arbitrage. There are lots of articles on the mechanics.