US government bonds yield cross 5%, a decadal high: Should you invest?

Factors to consider for investing in US government bonds

Some of the factors that are favourable for investing in US government bonds include the following:

Good yield: Currently, the yield on US government securities of various maturities, such as 1, 2, 3, 5, 7, and 10-year, is in the 4.5% to 5.5% range. These are attractive yields when compared to yields on these securities in the past. These yields were last seen in 2007-08, which was 15 years back. Also, the current high yields will not last for too long. Hence, you may consider investing in US government bonds and lock in the current high yields.

Potential for capital appreciation: The current yields on US government bonds are high as the US Federal Reserve has raised interest rates to combat high inflation. However, in the last one year, the US inflation has come down significantly from the 9.1% peak rate to 3.70% in September 2023. Also, there is fear that the current high interest rates may slow down the US economy significantly or even lead to a recession. Once the inflation rate falls to the US Fed’s target of 2% or below, or the US economy slows significantly/recession, the US Fed will cut interest rates.

Interest rates and bond prices have an inverse relationship. When interest rates fall, the bond prices rise and vice versa. So, whenever the US Fed cuts interest rates, the bond prices will rally, and you will have an opportunity to make capital gains. The bonds with a longer maturity (5, 7, 10 years, etc.) have a higher sensitivity to changes in interest rates compared to bonds with lower maturity (1, 2, 3 years, etc.). The higher the sensitivity to changes in interest rates, the higher the potential for capital gains.

As per the analysts’ current projections, the US Fed is expected to cut interest rates in the second half of 2024. Till that happens, you can benefit from the current high yields.

Depreciation of the Indian Rupee against the US Dollar: When you invest in US Dollars, the depreciation of the Indian Rupee against the US Dollar adds to your gains. In the last decade, the Indian Rupee has depreciated against the US Dollar at an average rate of around 3%.

10-year movement of Indian Rupee vs US Dollar

(Source: Yahoo Finance)

The above chart shows how the Indian Rupee has moved against the US Dollar in the last ten years from levels of around Rs. 61.3 (as of October 2013) to current levels of around Rs. 83.20 (as of October 2023). In future, any depreciation in the Indian Rupee against the US Dollar will add to your overall gains from the investment in US government bonds.

Portfolio diversification in an asset class with a strong credit rating: Investment in US government bonds will provide country-specific diversification (geographical diversification). Your investment portfolio should be diversified at various levels, such as country-wise diversification, diversification into different asset classes, diversification within each asset class, etc.

Also, US government bonds have one of the best credit ratings. The US government has never defaulted on its debt obligations. The US government bonds enjoy one of the highest liquidity. So, selling to the US government is easy as there are buyers and sellers available at any point in time.

How to invest in US government bonds

Now that we understand the benefits of investing in US government bonds, let us look at how to invest in them. Recently, two AMCs have launched three mutual fund schemes that allow you to invest in US government bonds. These include:

Aditya Birla Sun Life US Treasury 1-3 Year Bond ETFs Fund of Fund

The scheme will invest in US government bonds with a tenure of 1-3 years. It will give you a high yield with low duration risk as the bonds’ tenure is low, resulting in lower volatility in bond prices. The scheme is for investors who want to benefit from a combination of high yield and low duration risk.

Aditya Birla Sun Life US Treasury 3-10 Year Bond ETFs Fund of Fund

The scheme will invest in US government bonds with a tenure of 3-10 years. It will allow you to lock into high yields for a long tenure. As the tenure of bonds is high, they will be sensitive to interest rate movements, leading to volatility in bond prices. In future, when US interest rates move down, you will benefit from capital gains. The scheme is for investors who want to benefit from a combination of high yield and capital gains.

Bandhan US Treasury Bond 0-1 Year FOF

The scheme will invest in US treasury securities with a 0-1 year maturity range. It will give you the combination of high yield and low duration risk.

When you invest in US government bonds through any of the above mutual fund schemes, you will benefit from no LRS compliance and no TCS. Investing in US government bonds looks more favourable than in the last ten years. It is an opportunity to benefit from current high yields, potential capital gains in the future, additional benefits from potential INR depreciation, and geographical diversification.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.

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Updated: 09 Nov 2023, 08:57 AM IST