US Treasury Bonds or Gold in the Current US Market: In October, there was a significant rise in the yields of US Treasury bonds. The 10-year yield reached 5 percent, the highest level since 2007, while the two-year yield reached 5.25 percent, the highest since 2000.
US Treasury Bonds or Gold in the Current US Market
US Treasury Bonds or Gold in the Current US Market, Vaibhav Kaushik, a Research Analyst at GCL Broking, explained, “The 10-year bond yield in the US has increased by nearly four hundred basis points from 1.01 percent in 2020. The recent increase in bond yields is influenced by factors such as rising crude oil prices, concerns about inflation, and signals from the US Federal Reserve indicating more interest rate hikes.”
One contributing factor to the rise in bond yields is the high level of government borrowing. The fear of prolonged high interest rates further fueled the increase in the US 10-year yield. Strong US economic data has also led to expectations that the Federal Reserve will keep interest rates higher for a longer duration. Additionally, investors are concerned about the large government borrowing programs in the pipeline.
Over the past 18 months, the US Federal Reserve has raised interest rates by 500 basis points, partly offset by better-than-expected data on US retail sales, the labor market, and inflation. High yields suggest that inflation may remain persistently high, and interest rates may either rise or stay unchanged.
“Since May 2022, the US Federal Reserve has increased interest rates by approximately 500 basis points, from 0.25-0.50 percent to 5.25-5.50 percent currently. Increasing yields put significant pressure on any interest rate hikes. Another reason for the outflow of money is the growing gap between the returns of sovereign guaranteed bonds and bank fixed deposits. Therefore, the bond market reflects investors’ anticipation of an increase in interest rates,” Kaushik added.
If you’re interested in investing in US bonds and gold, exchange-traded funds (ETFs) are an investment vehicle that allows multiple investors to pool their funds to purchase shares, bonds, or other securities, similar to mutual funds. Many ETF options are available to Indian investors, focusing on the US market.
Suresh Surana, the Founder of RSM India, emphasized, “Resident Indians looking to invest abroad should be aware that these transactions fall under the purview of RBI’s Liberalized Remittance Scheme (LRS), with a threshold limit of $250,000 per financial year. However, investors may be subject to TCS under section 206C(1G) of the Income Tax Act at a rate of 20% on remittances exceeding Rs 7 lakh (effective from October 1, 2023). The credit for this TCS can be reflected in Form 26AS and can be claimed as prepaid taxes against taxable income when filing the tax return.”
To start investing in US stocks through ETFs, Indian investors need to open a demat and a trading account with a brokerage firm that provides access to US stock exchanges. Numerous mobile applications empower Indian investors to invest in US stocks and ETFs, offering a convenient and user-friendly platform for portfolio management.
Once you have an account, you can search for US-based ETFs that match your investment goals and risk tolerance. ETFs can be bought and sold, typically incurring lower transaction fees than mutual funds.
Recently, Aditya Birla Mutual Fund introduced the US Treasury Bonds Fund of Funds, which enables investment in US ETFs through mutual funds. Regulatory filings are managed by the mutual fund and are not subject to any LRS cap. However, there is an overall limit of $1 billion on the industry and $250 million on the industry. Another option is to invest directly overseas, but it has its limitations.
When it comes to choosing between investing in US Treasury bonds or gold, analysts suggest that the Federal Open Market Committee (FOMC) is likely to pause interest rates due to the recent increase in treasury yields, reducing the need for further rate hikes. Many experts believe the Federal Reserve is nearing the peak of its interest rates, making US Treasuries an attractive option. However, it’s important to note that U.S. Treasury bonds are not directly available for Indian investors, but they can use publicly traded exchange-traded funds (ETFs) to invest in them and gain passive exposure to US government bonds.
Regarding gold, experts point out that gold is a relatively stable investment compared to other options like stocks and mutual funds. Gold often generates returns even during stock market downturns and can serve as a source of diversification. Whether to invest in gold depends on various factors like investment goals, risk tolerance, expected returns, and investment horizon.
Renisha Chainani, Head of Research at Augmont Gold for All, mentioned, “In the near term, attention will mainly be focused on when the first rate cut will occur and how many will be made. Gold has a bullish short-term outlook due to the uncertainty surrounding the Fed’s future policy and escalating geopolitical tensions. Until there is greater clarity on both fronts, investors are likely to continue pouring money into this safe-haven asset.”
On the other hand, as interest rates rise, some investors may choose to sell their bonds before maturity to avoid losing capital gains. This increase in yields also impacts debt investors. Mortgage rates are rising due to the increase in yields, which can have negative effects on borrowers, banks, and investment funds. This could lead to a reduction in bank lending to the economy.
Chainani added, “Treasury ETFs can focus on specific maturities or a range of maturities and consist of a basket of treasury securities. You have the same trading flexibility with these ETFs as you do with stocks on an exchange. Furthermore, Treasury ETFs never expire, in contrast to Treasury bonds. They pay interest in the form of a monthly dividend and regularly rebalance their bond holdings by acquiring new bonds.”