U.S. Treasury bonds can be a good investment if you’re looking for safety and a fixed rate of interest (regular coupon payments) until the bond’s maturity. They offer investors what are regarded as some of the safest, fixed-income returns available.
Given the current volatility, U.S. Treasury bonds can be an important piece of your investment portfolio, since the steady returns from bonds can help offset the volatility of equity prices. Keen on knowing more? Let’s start with the basics.
What are the positives and negatives?
Like investing in equity markets comes with gains and calculated risks, investing in U.S. Treasury bonds does too, and it’s essential to understand the risk-reward profile. The positives include receiving a regular income through interest payments, principal payback on maturity, capital gains on selling the bond at a higher price. Most investors consider U.S. debt instruments, including Treasury bonds, to be risk-free because the government secures them with its ability to tax American citizens and residents. On the negative side, bonds usually pay lower returns than equities, and the market price of the bond is subject to the volatility
Why are U.S. Treasury bonds becoming increasingly popular among investors?
The U.S. bond markets have been reacting quite positively over the interest rate hikes lately after the U.S. Fed increased its interest rates by 25 basis points in its latest FOMC meet this month. The Fed Chair, Jerome Powell, proposed a quarter-point hike in the Federal Funds Rate to control the rising inflation in the U.S. economy and this is likely to be followed by atleast six more (0.25% each) rate hikes this year. The Federal Reserve has begun its unwinding of the pandemic-era stimulus measures in an effort to control the rising inflation numbers. The shift towards the tighter monetary policy by the U.S. Fed is likely to push the bond yields higher, making them an attractive asset class among investors. The benchmark U.S. 10-year Treasury yields trades above the 2%, (currently at 2.25%) the highest level since 2019. Treasury yields move inversely to price
How to invest in U.S. Treasury Bonds from India?
The easiest way to invest in U.S. treasuries and corporate bonds from India is through low-cost ETFs. At Stockal, we have more than 5,500 stocks and ETFs listed on our platform for Indian investors to take advantage of across the geographies.
Investors may look at several bond ETFs among the traditional U.S. bonds issued by the corporates or the government bonds. The floating rate bonds and the Treasury Inflation-protected Securities (TIPS) bonds among others are turning out to be an increasingly popular asset class for investors in the U.S. debt securities after the current interest rate hikes proposed by the U.S. Federal Reserve.
Investors prefer to invest in bond ETFs as they tend to be less risky than stocks in a volatile and uncertain environment and bond ETFs make it easier to invest in a basket of bonds thus reducing the risk of default by any individual bond issuer.
Floating rate bonds
As the name suggests, floating rate bonds do not pay a fixed rate of coupon to investors. However, they normally have a variable coupon rate which is usually linked or benchmarked to an underlying index.
Amid the current geopolitical tensions in Europe, and significant improvement seen in the U.S. unemployment numbers returning to their pre-pandemic levels, the Fed has begun to hike the benchmark interest rates which makes floating rate bonds an attractive debt investment in the current scenario.
Also, unlike the fixed coupon bonds, the floating rate bonds do not lose their value when the interest rates go up and are best suited for investors for protecting against any capital erosion in a rising rates kind of an environment.
Treasury inflation-protected securities (TIPS) bonds
Treasury inflation-protected securities (TIPS) make for another good bond investment when interest rates are on the rise along with a higher inflationary environment like what we are currently witnessing in the U.S. TIPS are U.S. Treasury Bonds similar to other Treasury Securities issued by the U.S. government and have a fixed coupon rate.
TIPS Bonds alter in price to adjust for the rising inflation thereby sustaining its real value and considers the real yields (after adjusting for inflation) unlike the traditional bonds which look at the nominal yields.
A safe asset to offset geopolitical volatility
U.S. bond ETFs are a worthy alternate asset class given the current high inflationary and volatile equity markets amid the uncertain geopolitical tensions, rising crude oil and commodity prices.
Investors may look at investing in the U.S. bonds and Treasuries by allocating 10-20% of their investments in bond ETFs available on Stockal. Some of the popular Bond ETFs which Indian investors can look at for investments in 2022 are listed in the table below.
Source: MSN Money, Prices as of 15 March, 2022
Investing in Bonds helps mitigate downside risks of portfolios
During volatile market conditions, diversification of portfolios to include a combination of asset class like Bonds and Equities, help investors weather the storm thus reducing the downside risk of portfolios. When you look at the chart below, a portfolio with a combination of stocks and bonds has never produced a negative return across a five-year rolling period, over the last seven decades.