An annualized return of over 5%, a US bond investment tutorial for newbies

Since March 2020, the US has raised interest rates 11 times, and the federal benchmark interest rate has been raised from 0.25% to 5.5%. There is already very little room for interest rate hikes in the US, and the market expects to cut interest rates before the end of 2024. In this context, US bonds have attracted the attention of many investors, so for mainland investors, what exactly is the right position to invest in US bonds?

US debt is a broad term. In fact, just like domestic bonds, US bonds also include two types of credit bonds and interest rate bonds. Among them, interest rate bonds refer to bonds that have no credit risk, that is, they are very safe and can definitely repay debt and interest. Their market performance is only affected by interest rates, so they are called interest rate bonds. Typical interest rate bonds are treasury bonds or local government bonds. Credit bonds, on the other hand, have credit risk, which means they may not be able to repay debt or interest.

Typical credit bonds are corporate bonds. Since enterprises have this risk of explosion, the yield on credit bonds is also generally higher than that of profit bonds. Overall, since credit issuers are mixed, they are more suitable for investors with high risk appetite and strong expertise, so this is not our focus. Therefore, below we will focus on interest rate bonds that are more suitable for most people.

Taking US treasury bonds as an example, they can be divided into three categories according to different terms. The term is less than or equal to 1 year called short-term treasury bonds. Treasury Bills, or T BILLS for short, are called medium-term treasury bonds with a term greater than 1 year but not longer than 10 years. Treasury Notes is abbreviated as T-Notes, and long-term treasury bonds with a term of more than 10 years are called T-Bonds for short. Let's just say, the first is short-term debt T-Bills.

T-Bills expire in as little as one month and at most as long as one year. Up to now, T-Bills has an annualized yield of more than 5%, and the annualized yield of one monthly T-Bill has reached 5.37%, which can be said to be very attractive.

After all, the annualized yield of the S&P 500 is around 8%, and you have to take greater risks. After talking about the advantages of T-Bills, let's talk about its shortcomings, which is that investing in T-Bills requires the risk of reinvestment. Let's say you invested in a one-month T-Bills today, but after a month, you took back the money and wanted to invest in T BILLS again, only to discover that the Federal Reserve cut interest rates, which caused the interest rate on your new T-Bills purchase to drop at the same time.

This is called reinvestment risk. It is recommended to lay out TPU through ETFs, because the funding threshold for buying bonds separately is high, and you have to buy them manually when they expire, which is quite troublesome. ETFs are more convenient and require minimal management fees. Related, the ETF is SGOV. The yield for the past year was 5.43%, and the management fee was 0.07%.

Then there are medium- to long-term treasury bonds T-Notes and T-Bonds. If you invest in T-Bonds, then the more the Fed raises interest rates, the better for you, because in this way, your yield will also be higher and higher. In other words, T-Bills has a shorter term, so the interest rate risk is not obvious. But this is not the case for medium- to long-term treasury bonds, as they are more sensitive to changes in interest rates. What kind of logic is this?

Let's talk about it here. For example, now the US government has issued a 10-year treasury bond with a face value of 100 dollars. The coupon interest rate is 5%, that is, a fixed interest payment of 5 dollars at the end of each year, and debt repayment by the end of the 10th year. So the cash flow this treasury bond brings to investors is like this. If the interest rate on the market is 6% at this time, then obviously this bond that only pays you 5% interest every year is definitely not worth your expenses; its face value is 100 dollars to buy it. You will be asked to evaluate this claim based on the current 6% interest rate on the market. After discounting the bond's cash flow according to the expected yield of 6%, you find that this bond is now only worth 92.64 dollars, so if the market interest rate is reduced from 6% to 4% at this time, then your bond with a 5% coupon interest rate will be very popular and very valuable.

Calculated in the same way, the value is $108.11, which is $15.47 higher than when the original interest rate was 6%, an increase of 16.7%, or even $8 above face value. Therefore, changes in interest rates will directly affect the price of your bonds. The lower the interest rate, the higher the bond price, the lower the bond price. This is called interest rate risk. Moreover, you will find that the longer the term of a bond, the higher the interest rate risk, which means that the longer the term of the bond, the greater the price increase or decrease caused by the same changes in interest rates.

For example, in the US, during this round of interest rate hikes that began in March 2020, the federal benchmark interest rate was rapidly raised from 0.25% to today's 5.52%. Debt repayment ETFs of 10 years or more were once sluggish, and this decline was no weaker than stocks. Therefore, for medium- to long-term US bonds, the risk is not low unless you hold it to maturity. Moreover, even if your holding expires, you will need to endure large price fluctuations during the holding period, especially during the interest rate hike cycle.

Fortunately, the Fed's interest rate hike has almost come to an end, and the market is already looking forward to cutting interest rates. From this perspective, whether you adopt a strategy to earn interest at maturity, or wait for the interest rate cut cycle to earn the difference, you can indeed start paying attention to medium- to long-term US bonds. So how to lay out medium- to long-term US debt? Like short-term bonds, although you can buy medium- to long-term US bonds through some brokerage firms, I don't recommend doing this because the ease and complexity of buying them is very unfriendly to you, and the liquidity is poor, so if you're not careful, you'll step into a hole. In comparison, buying a US bond ETF would be much better.

If you have opened a Hong Kong and US stock account, you can search and buy by yourself according to the code. The operation method is the same as buying stocks, which is very convenient. If you don't have an account yet, you can go to Hong Kong to open an account, deposit funds to Yingtou Securities, Carson Wealth Management, and make an investment. If it's not convenient to open a Hong Kong card, you can use the new US/Hong Kong stock trading wallet BiyaPay to trade directly, or use it as a professional deposit and withdrawal tool.