In recent times, the US financial landscape has witnessed remarkable changes, especially in the US Treasury bond yields. As investors grapple with the effects of these changes, the question remains: Should one invest in US Treasury bonds or gold?
1. A Look at the US Treasury Bond Yields
A Historical Surge
October observed an unprecedented spike in US Treasury bond yields. The 10-year yield surged to 5%, its peak since 2007, while the two-year yield reached 5.25%, a record since 2000.
Factors Driving the Surge
- Rising crude oil prices
- Inflation concerns
- Signals from the US Federal Reserve pointing to increased interest rates
- High government borrowing
All these factors, combined with robust US economic data, suggest that the Federal Reserve could sustain these elevated interest rates.
2. The Role of the US Federal Reserve
Over the past 18 months, the Federal Reserve has elevated interest rates by a substantial 500 basis points. This increase was somewhat balanced by optimistic data on US retail sales, employment, and inflation. Such high yields indicate enduring high inflation and potential further interest rate hikes.
3. Investing in US Bonds and Gold: How and Why?
Exchange-Traded Funds (ETFs)
For those looking at investing in US bonds and gold, ETFs provide a viable option. These tools gather funds from numerous investors to purchase shares, bonds, or other securities. For Indian investors keen on the US market, there’s an array of ETF choices.
Table: Comparing US Bonds and Gold
| Criteria | US Treasury Bonds | Gold |
|---|---|---|
| Risk | Moderate | Low |
| Returns | Varies with interest rates | Stable, especially during stock market crashes |
| Investment Medium | ETFs | Direct Purchase or ETFs |
| Liquidity | High (through ETFs) | High |
| Impact of Rate Hikes | Prices might fall | Typically rises as a safe-haven |
Navigating the Indian Regulatory Landscape
Indian investors should be wary of the RBI’s Liberalised Remittance Scheme (LRS), which caps investments abroad. Furthermore, investments exceeding Rs 7 lakh will be subject to a 20% TCS as of 1st October 2023.
4. Current Expert Opinions
While the Federal Open Market Committee (FOMC) is likely to halt interest rate hikes, experts believe that the Federal Reserve is nearing its peak. This implies that investing in US Treasuries might be a wise decision.
On the other hand, gold’s inherent stability and its role as a hedge against inflation make it a crucial asset for diversified portfolios.
5. The Implications of Rising Yields
Increasing yields impact borrowers, banks, and investment funds. Higher mortgage rates may lead to a decrease in bank lending, which can dampen economic growth. For investors in Treasury ETFs, it’s important to note that these ETFs never expire, unlike Treasury bonds, and provide the same flexibility as stocks.
Related Questions and Answers:
- How has the US Treasury bond yield changed recently?
- The 10-year yield hit 5%, the highest since 2007, while the two-year yield reached 5.25%, the highest since 2000.
- Why are ETFs a popular choice for investing in US bonds and gold?
- ETFs offer a pooled investment approach, similar to mutual funds, but with typically lower transaction fees and high liquidity.
- How does the RBI’s LRS affect Indian investors?
- The LRS sets a cap of $250,000 per financial year for investments abroad by Resident Indians.
- What are the advantages of investing in gold?
- Gold is a stable investment, often providing returns even during stock market downturns, and serves as a hedge against inflation.
- How do rising yields affect the economy?
- Rising yields can lead to increased mortgage rates, potentially reducing bank lending and hampering economic growth.