In October, there was a sharp increase in US Treasury bond yields. The 10-year yield hit 5 per cent, the highest since 2007, while the two-year yield hit 5.25 per cent, the highest since 2000.
“The 10-year bond yield in the US has increased by almost four hundred basis points from 1.01 per cent in 2020. The recent tightening of bond yields is influenced by factors such as an increase in crude oil prices, risk of inflation, and the signals sent out by the US Federal Reserve towards more interest loans,” said Vaibhav Kaushik, Research Analyst, GCL Broking.
High government borrowing is another factor contributing to harder bond yields. Fears of prolonged high interest rates fuelled further up move in the US 10-year yield. In addition, strong US economic data led to the assumption the Fed will likely keep rates higher for longer. Also, investors are worried about the large government borrowing programmes on the horizon.
Over the last 18 months, the US Fed did deliver an increase (500 basis points) in interest rates, and this was partly compensated for by stronger-than-expected data on US retail sales, the labour market, and inflation. High yields forecast that inflation will be stubbornly high and an interest rate either may go up or remain unchanged.
“Since May 2022, the U.S. Fed has increased interest rates by about 500 basis points from 0.25–0.50 per cent to 5.25–5.50 per cent currently. Briefly, increasing yields exerts massive pressure on any rise in interest rates. Another reason for this outflow of money is the increasing gaps between the returns of sovereign guaranteed bonds and the bank fixed deposit. As such, the bond market reflects the investors’ expected increase in interest rate,” said Kaushik.
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How can one invest in U.S. bonds and gold? Exchange-traded funds (ETFs) are an investment tool that involves pooling funds from multiple investors to buy shares, bonds, or other securities, similar to mutual funds. Many ETF options are open to Indian investors, focusing on the U.S. market.
Suresh Surana, Founder of RSM India, said, “It is pertinent to note that Resident Indians looking forward to making investments abroad need to keep in mind that such transactions shall fall within the purview of RBI’s Liberalised Remittance Scheme (LRS) and accordingly the threshold limit of $250,000 per financial year shall apply to them. However, investors would be subjected to TCS u/s 206C(1G) of the I.T. Act @ 20% on the amount of remittance exceeding Rs 7 lakh (w.e.f. 1st October 2023). The credit for such TCS shall be reflected in Form 26AS and can be claimed as prepaid taxes against the taxable income while filing the tax return by the Individual.”
To begin investing in U.S. stocks through ETFs, Indian investors need to open a demat and a trading account with a brokerage firm that provides access to U.S. stock exchanges. Numerous mobile applications empower Indian investors to invest in U.S. stocks and ETFs, offering a convenient and easy-to-use platform for portfolio management.
After opening an account, investors can search for US-based ETFs that align with their investment goals and risk tolerance. Like with shares, ETFs can be bought and sold, typically incurring lower transaction fees than mutual funds.
Recently, Aditya Birla Mutual Fund has launched the US Treasury Bonds Fund of Funds, which allows you to invest through mutual funds in the US ETF. The regulatory filings are taken care of by the mutual fund and are not subject to any LRS cap. There is, however, an overall limit of $ 1 billion on the industry and $250 million on the industry. Another method is to invest directly overseas. But it has its own limitations.
Should you invest in U.S. Treasury bonds or gold? Analysts say the Federal Open Market Committee (FOMC) will likely pause interest rates next week, as the recent spike in treasury yields has lessened the need for further rate hikes. The FOMC seems to have finished raising rates in light of these most recent remarks and events in the bond market.
Many experts believe the Federal Reserve is approaching its peak interest rates, making it a sensible choice to invest in US Treasuries. However, one must understand that U.S. Treasury bonds are not available for direct purchase by Indian investors. However, they may employ publicly traded exchange-traded funds (ETFs) to purchase US Treasury bonds. Investors can obtain passive exposure to US government bonds through Treasury ETFs.
Talking about gold, experts say gold is not a very volatile form of investment compared to other investment sources such as equities, mutual funds, etc. Rather, gold generates returns even during stock market crashes and may prove to be a good source for diversification. “As gold is considered a low-risk, safe-haven investment and hedge for inflation, it is perfect for a balanced portfolio. However, deciding whether to invest in gold would depend upon various factors such as investing goals, risk appetite, expected returns, time horizon for investment, etc..,” said Surana.
“Going forward, attention will mostly be focused on when the first-rate cut will occur and how many will be made. Gold has a bullish short-term outlook, given the ambiguity surrounding the Fed’s future policy and the escalating geopolitical tensions. Until there is greater certainty on both fronts, investors will probably keep pouring money into this safe-haven gold,” said Renisha Chainani, Head of Research of Augmont Gold for All.
Conversely, investors sell the bond before maturity because they fear losing their capital gains when the interest rates rise. This rise in yields will also affect debt investors.
Chainani said, “Mortgage rates are rising due to the increase in yields, which is bad for borrowers and painful for banks and investment funds alike. This could lead to a reduction in bank lending to the economy. Treasury ETFs can focus on a specific maturity or a range of maturities and comprise of 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. Bonds with varying maturities will be included in a treasury ETF at any moment. Treasury ETFs pay interest in the form of a monthly dividend and regularly rebalance their bond holdings by acquiring new bonds.”