In October, the United States experienced a significant surge in Treasury bond yields. The 10-year yield reached 5%, marking its highest level since 2007, while the two-year yield climbed to 5.25%, the highest it has been since 2000.
Vaibhav Kaushik, a Research Analyst at GCL Broking, explained the factors behind this yield tightening, stating, “The 10-year bond yield in the US has risen by nearly four hundred basis points from 1.01% in 2020. The recent surge in bond yields can be attributed to factors like rising crude oil prices, concerns about inflation, and signals from the US Federal Reserve indicating a potential increase in interest rates.”
The increasing government borrowing has also contributed to the rise in bond yields. The fear of prolonged high-interest rates further fueled the increase in the US 10-year yield. Robust economic data in the US suggested that the Federal Reserve might maintain higher rates for an extended period. Additionally, concerns arose regarding the large government borrowing programs in the pipeline.
Over the past 18 months, the US Federal Reserve raised interest rates by 500 basis points, partly offset by stronger-than-expected data related to US retail sales, the labor market, and inflation. High yields in the bond market indicate expectations of persistent inflation and the possibility of either raising or maintaining interest rates.
Kaushik pointed out, “Since May 2022, the U.S. Fed has increased interest rates by about 500 basis points, from 0.25–0.50% to 5.25–5.50% currently. Increasing yields put significant pressure on any rise in interest rates. Another reason for the outflow of money is the widening gap between the returns of sovereign guaranteed bonds and bank fixed deposits. Therefore, the bond market reflects investors’ expectations of rising interest rates.”
Investing in U.S. bonds and gold can be approached through Exchange-Traded Funds (ETFs). ETFs pool funds from multiple investors to invest in shares, bonds, or other securities, akin to mutual funds. Numerous ETF options targeting the U.S. market are available to Indian investors.
Suresh Surana, Founder of RSM India, advised that Indian investors interested in investing abroad should be aware that such transactions fall under the purview of the RBI’s Liberalized Remittance Scheme (LRS), subject to a threshold limit of $250,000 per financial year. However, investors exceeding remittances of Rs 7 lakh (effective from October 1, 2023) will face a 20% TCS under section 206C(1G) of the Income Tax Act. This TCS credit will appear in Form 26AS and can be claimed as prepaid taxes when filing tax returns.
To invest in U.S. stocks via ETFs, Indian investors need to open a demat and trading account with a brokerage firm providing access to U.S. stock exchanges. Mobile applications are available to empower Indian investors to invest in U.S. stocks and ETFs, offering a convenient platform for portfolio management.
After establishing an account, investors can search for U.S.-based ETFs that align with their investment goals and risk tolerance. ETFs, like stocks, can be bought and sold, often incurring lower transaction fees compared to mutual funds.
Recently, Aditya Birla Mutual Fund introduced the US Treasury Bonds Fund of Funds, allowing investment in U.S. ETFs through mutual funds. Regulatory filings are handled by the mutual fund and are not subject to LRS caps. However, an industry limit of $1 billion and an investment limit of $250 million apply. Alternatively, investors can directly invest overseas, but this method has its limitations.
The choice between investing in U.S. Treasury bonds or gold depends on various factors such as investment goals, risk tolerance, expected returns, and investment horizon. Experts suggest that as the Federal Reserve is nearing the peak of its interest rate hikes, investing in U.S. Treasuries is a sensible option, even though Indian investors cannot directly purchase U.S. Treasury bonds. They can utilize publicly traded ETFs to gain passive exposure to U.S. government bonds.
Regarding gold, experts emphasize its relatively lower volatility compared to other investment sources like equities and mutual funds. Gold can act as a hedge during stock market downturns and offers diversification benefits. Deciding whether to invest in gold depends on individual factors such as investment goals and risk appetite. The uncertainty surrounding the Fed’s future policies and geopolitical tensions is likely to keep investors interested in gold as a safe-haven asset.
In conclusion, while the rise in yields affects bond investors, it’s worth noting that mortgage rates are increasing due to higher yields, impacting borrowers and financial institutions. Treasury ETFs can offer flexibility, and they never expire, unlike Treasury bonds. These ETFs pay interest in the form of monthly dividends and regularly rebalance their bond holdings by acquiring new bonds.