Current Situation and Allocation Suggestions in the U.S. Treasury Bond Market
03-25 17:44uSMART

What Are U.S. Treasury Bonds?

U.S. Treasury bonds, also known as U.S. Treasury securities, are bonds issued by the U.S. government. When investors purchase U.S. Treasury bonds, they are essentially loaning money to the U.S. government. In return, the U.S. government repays the principal amount and pays a certain amount of interest when the bond matures.


Types of U.S. Treasury Bonds:

1.Treasury Bonds: Also known as long-term bonds, with maturities exceeding 10 years. Treasury bonds typically have higher coupon rates and fixed interest payment periods.

2.Treasury Bills: Also known as short-term bonds, with maturities of one year or less. Treasury bills are usually issued at a discount and redeemed at full face value upon maturity.

3.Treasury Notes: Intermediate-term bonds with maturities ranging from 2 to 10 years.

4.Treasury Inflation-Protected Securities (TIPS): These bonds' principal values are adjusted based on inflation levels to protect against inflation risk.

5.Floating Rate Notes (FRNs):These bonds have interest rates that fluctuate with market rates.


Factors Influencing U.S. Treasury Bonds:

1.Interest Rate Policy:The Federal Reserve's interest rate policy is one of the most important factors. Rising interest rates may lead to a decline in bond prices, while falling rates may boost bond prices.

2.Inflation Expectations:Bond investors pay attention to inflation expectations. Increased inflation expectations may lower the real yield of bonds, affecting bond prices.

3.Economic Data:U.S. economic data has a significant impact on the U.S. Treasury bond market. Strong economic data may cause bond prices to fall as investors prefer higher-risk, higher-return assets.

4.Geopolitical Risks:Global geopolitical events and instability can also affect sentiment and volatility in the U.S. Treasury bond market.


Benefits of Investing in U.S. Treasury Bonds:

1.Safety and Low Credit Risk: 

The U.S. government is one of the largest economies globally and typically holds the highest credit ratings, resulting in lower default risk for U.S. Treasury bonds.


U.S. Treasury bonds generally pay fixed interest rates, providing investors with stable interest income, which is attractive for those seeking steady cash flow.

3.Yield Potential:

While returns may not be as high as other investments like stocks, U.S. Treasury bonds offer relatively stable returns, suitable for investors seeking conservative returns.


The U.S. Treasury bond market is vast and highly liquid. Investors can easily buy and sell Treasury bonds, accessing funds or investing in other assets.

5.Diverse Choices: 

The U.S. Treasury bond market offers various types and maturities of bonds, allowing investors to choose based on their needs and risk preferences. This makes the market suitable for various types of investors, whether individuals or institutions.

6.Hedging Against Inflation Risk: 

Treasury Inflation-Protected Securities (TIPS) issued by the U.S. government can help investors hedge against inflation risk. TIPS' principal values adjust based on changes in inflation, ensuring preservation and appreciation of investors' principal and interest.


Profit Points:

1.Interest Income:Purchasing U.S. Treasury bonds allows investors to receive bond interest payments, one of the returns during the bond holding period.

2.Bond Price Changes: Bond prices are influenced by changes in market interest rates and supply-demand dynamics. If bond prices rise at the time of purchase, investors can sell at a higher price for profit.


Current Status of the U.S. Bond Market and Allocation Suggestions

Looking ahead, the U.S. market retains its advantages of openness, survival of the fittest, and active technological innovation. The U.S. maintains its technological advantage and high industrial status in industries such as AI, semiconductors, aerospace, and biomedicine, which will continue to drive economic growth in the long term. In addition, the U.S. government's policies advocating for the reshoring of manufacturing and re-industrialization further enhance the long-term growth potential of the U.S. economy.

However, we also need to recognize that U.S. society's political views are becoming increasingly polarized. Political views represented by figures like Trump, such as anti-global trade, anti-immigration, anti-technology cooperation, and anti-renewable energy, also have their soil. With the upcoming election year, there may be increased uncertainty. If the U.S. political landscape shifts to the other extreme, towards closure and isolationism, we will need to reevaluate the long-term prospects for the U.S.

Considering the above factors, we believe that in the short term, the Federal Reserve's pace and magnitude of interest rate cuts are not clear. There hasn't been a significant reason for a substantial rate cut, so U.S. bond yields are expected to remain high and fluctuate. With continued easing of inflation and other factors, a slight rate cut by the Federal Reserve is a high probability event in the later period. Therefore, from a medium to long-term perspective, the U.S. bond yield center is expected to decrease to some extent and fluctuate around a new center. We estimate that the ten-year U.S. bond yield will mainly range between 3% and 4% in the next 1 to 2 years.


Structure of the U.S. Bond Yield Curve (10-Year to 2-Year)


In terms of U.S. bond asset allocation, the representative of short-term U.S. bonds—the two-year Treasury bond yield—has maintained an inversion with the ten-year U.S. bond yield since July 2022, lasting for nearly a year and a half. Due to the higher annualized yield of short-term U.S. bonds and better liquidity, directly purchasing and holding U.S. bonds with maturities of two years and below currently offer better value for money. Additionally, U.S. bond ETFs and other products also have certain allocation value, but special attention should be paid to the risks that price fluctuations may bring.


How to Purchase U.S. Treasury Bond ETFs on uSMART SG

1.Open the uSMART SG APP.

2.Search for the code "XTWO.US" or similar for the desired U.S. Treasury Bond ETF.

3.Select the relevant ETF from the search results.

4.Click on "Trade" and then choose "Buy/Sell."

5.Proceed to unlock the transaction and follow the prompts to complete the purchase.


(This diagram is provided for illustrative purposes exclusively)



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Important Notice and Disclaimer:

We have based this article on our internal research and information available to the public from sources we believe to be reliable. While we have taken all reasonable care in preparing this article, we do not represent the information contained in this article is accurate or complete and we accept no responsibility for errors of fact or for any opinion expressed in this article. Opinions, projections and estimates reflect our assessments as of the article date and are subject to change. We have no obligation to notify you or anyone of any such change. You must make your own independent judgment with respect to any matter contained in this article. Neither we or our respective directors, officers or employees will be responsible for any losses or damages which any person may suffer or incur as a result of relying upon anything stated or omitted from this article.

This document should not be construed in any jurisdiction as constituting an offer, solicitation, recommendation, inducement, endorsement, opinion, or guarantee to purchase, sell, or trade any securities, financial products, or instruments or to engage in any investment or any transaction of any kind, nor is there any intention to solicit or invite the purchase or sale of any securities.

The value of these securities and the income from them may fall or rise. Your investment is subject to investment risk, including loss of income and capital invested. Past performance figures as well as any projection or forecast used in this article is not indicative of its future performance.

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