US Treasuries — An investment to treasure for now and the future

I recently came across this super interesting stat...

In its 80-year history, this was the first time India overtook the US in the number of GRE test-takers (for the uninitiated, GRE is one of the most popular exams for college admission in US and other countries).

If this tells us anything, it’s that Indians are becoming more aspirational day by day. And as our aspirations get global, we need investment avenues that help us get there.

In our view, US Treasuries are a much-needed asset class for now and for the future.

Four reasons why you should invest in US Treasury bonds

1. US dollar exposure

We all know inflation is a key factor to consider when planning for our goals. But for goals outside of India, accounting for inflation is just one half of the equation.

You should also consider currency movement between the Indian rupee and the foreign currency. In this case, you should consider the exchange rates between USD and INR i.e. cost of US dollar in INR terms.

In the last ten years, US tuition costs grew at an annual rate of 3%.

But in the same period, the USD to INR exchange rate went up from 62 to 83 (annualised change of 3%). After factoring currency depreciation, the overall increase in tuition fees becomes 6% (annualised, in INR terms).

Therefore, when planning for USD goals, you need an asset class that could help your account for both US Inflation as well as Rupee Depreciation and US treasuries provide just that!

2. Better capital protection as well as diversification

US Treasury bonds are essentially loans given to the US Government. They exhibit much lower volatility when compared to other asset classes such as US Equity – making them an ideal investment option.

The strength of US Treasuries as a diversifier is especially evident in times of crises. During periods of distress, money takes flight to safety. This results in increased demand for USD which often leads to strong outperformance of US Treasuries.

For instance, during the 2008 Global Financial Crisis, US 10 Year Bond outperformed India 10 Year Bond by 16%. And during the 2020 Covid Crash, the US 10 Year Bond outperformed by 17%.

4. A fall in US Yields could lead to additional gains

Between Mar-2022 and Jul-2023, the US Fed raised rates from 0.25% to 5.50% to curb inflation.

But the US inflation has been in a disinflationary trend for some time now and the wage growth has also started to soften in recent months. This indicates the possibility of rate cuts in the future. Further, the US government is also reducing its fiscal deficit which could bring down the supply of US Treasury securities. All these could result in lowering of US bond yields.

When yields fall, bond prices move up and this could result in extra returns.

For example, a bond portfolio with a modified duration of five years could make 5% in mark to market gains when yields fall by 1%.

But what about the risks?

In the last nine years, US Fed Fund rates went through a cycle of hikes and cuts.

During periods of rate hikes, funds with lower duration such as Money Market and Floating Rate Bond portfolios had done well.

On the other hand, when rate cuts happened, Long Duration portfolios delivered better returns.

Medium Duration and Inflation-Linked bonds did well when rates were flat.

As seen above, the performance of different bond categories varies with the interest rate cycle.

However, this interest rate risk can be mitigated with an active management approach which takes duration calls dynamically depending on the rate cycle.

Suitability

US Treasury investments are a no-brainer for those who have USD expenses coming up.

Even if you do not have any US goals, US Treasuries can still form part of your portfolio given that the return profile (based on historical evidence) tends to be similar to Indian G-Secs and that they offer diversification benefits. Further, you can also take advantage of the current elevated yields which if normalized could result in additional returns.

So, is there a way you can also try to benefit by investing in US treasury bonds? Yes, please talk to your MF Distributor or click below and we will get in touch.