Record Low Interest Rates on US Treasury Bonds... To Buy or Not to Buy

Published 09 Mar.2020 11:19(KST)

[Image source=Yonhap News]

[Asia Economy Reporter Eunmo Koo] As the global spread of the novel coronavirus infection (COVID-19) pushes the yield on the 10-year U.S. Treasury bond to a record low, investment in U.S. Treasuries is gaining attention. While existing investors can make decisions with ease due to expectations of further rate cuts by the U.S. Federal Reserve (Fed), it is analyzed that new investments carry risks.

According to Bloomberg on the 9th, the yield on the 10-year U.S. Treasury bond closed at 0.764% on the 6th, down 15 basis points (1bp=0.01 percentage points) from the previous day. The 10-year U.S. Treasury yield has been hitting record lows daily since it first fell below 1% at 0.914% on the 5th. The 2-year U.S. Treasury yield also closed at 0.511%, down 8.8bp from the previous day, dropping more than 1% from the beginning of the year (1.570%).

As U.S. Treasury yields fall, the returns of exchange-traded funds (ETFs) linked to bond prices are also rising. Bond prices move inversely to yields, so when yields fall, prices rise. According to the Korea Exchange, as of the closing price on the 6th, KBSTAR U.S. Long-Term Treasury Futures Leverage (Synthetic H) rose 19.3% since last month. KODEX U.S. Treasury Ultra 30-Year Futures (H) (12.1%), KBSTAR U.S. Long-Term Treasury Futures (H) (8.9%), TIGER U.S. Treasury 10-Year Futures (5.3%), and KODEX U.S. Treasury 10-Year Futures (4.7%) also showed superior returns compared to the KOSPI (-3.7%) during the same period.

With concerns over the global spread of COVID-19 intensifying, the Fed preemptively cut interest rates, but strong safe-haven demand is driving up U.S. Treasury demand. On the 3rd, the Fed held an unscheduled emergency meeting for the first time since the 2008 financial crisis and cut the benchmark interest rate by 50bp to 1.00-1.25%. Jeongin Heo, a researcher at KTB Investment & Securities, explained, "This is the result of capital movement due to safe-haven preference, and at the same time, there is an expectation that the U.S. can lower the benchmark interest rate to the desired level."

The favorable environment for U.S. Treasury investment is expected to continue for the time being. Considering the poor economic indicators that will be confirmed in the future, it is expected that the stock market will not recover quickly. Researcher Heo predicted, "Considering expectations of further rate cuts by the Fed and the poor economic indicators due to COVID-19 that will be confirmed from this month, purchases of U.S. Treasuries will be concentrated until mid-second quarter." Dongjin Gong, a researcher at Daishin Securities, also said, "From a strategic perspective, investors who already hold bonds at a neutral level or have extended duration do not need to urgently seek exit strategies in the current strong market."

However, it is pointed out that new entries into the bond market need to be carefully considered. Researcher Gong explained, "Since yields have sharply declined in the short term, the expected returns represented by the absolute yield level have relatively decreased, and it is necessary to gradually prepare for the risk that the current rally atmosphere may suddenly reverse."