【4.5%+】Yield climbing? Time for investing in US Treasuries

Hello, Tigers~

The minutes from the January FOMC meeting indicate that the current policy interest rates have reached the peak of the current tightening cycle. According to current data, there is still no apparent trend of inflation rebounding. Influenced by this information, the yields on long-term US Treasuries have gradually risen to 4.5%.

It must be emphasized that the rebound in US Treasury yields this time requires our attention, and the window for allocating long-term US Treasuries may have already appeared!

Let me explain why investing in US Treasuries now is the best choice.

I. Core Data for US Treasuries

When delving into US Treasury investment, it's essential to grasp three key pieces of data

1.The 10-year US Treasury yield

This refers to the expected yield from purchasing and holding 10-year US Treasuries issued by the United States. It reflects investors' views on future economic conditions and inflation expectations.

Simply put, when investors feel uncertain about the economic outlook or are concerned about rising inflation, they may buy US Treasuries, driving up their prices and thus reducing the real yield of the bonds.

Conversely, when investors are optimistic about the economic outlook, they may prefer to invest in risk assets such as stocks. At this time, the demand for US Treasuries decreases, leading to an increase in US Treasury yields. Generally, the yield of US Treasury is inversely proportional to their prices.

2.Two Core Inflation Indicators

Inflation indicators are crucial for US Treasury investment because inflation determines whether the Federal Reserve needs to raise or lower interest rates, directly impacting US Treasury yields.

Therefore, the following two core inflation indicators must be closely monitored:

A. Consumer Price Index (CPI)

CPI is commonly used to measure the level of inflation, as it represents the rise in the general price level.

When inflation expectations increase, investors may be concerned about the decline in future purchasing power, demanding higher interest rates to offset the impact of inflation. This leads to a decrease in US Treasury prices, resulting in an increase in US Treasury yields.

B. Personal Consumption Expenditures (PCE)

PCE primarily measures the total expenditures of individuals and households on goods and services over a certain period.

Similar to CPI, PCE is an important indicator for observing inflation. When PCE rises, indicating an increase in personal and household spending, it leads to expectations of future inflation. For investors, fearing the erosion of future purchasing power due to inflation, they may demand higher interest rates to counteract this impact, causing US Treasury prices to decrease and yields to rise.

II. Why is the Time to Allocate Long-Term US Treasuries?

After understanding the core data related to inflation mentioned above, let's explain why now is the opportune moment to seize the chance for Treasuries:

1.Historical Performance of Transitioning from Rate Hikes to Rate Cuts in US Treasuries

As the transition from rate hikes to rate cuts occurs, investors' optimism about the macroeconomic outlook and corporate profitability tends to shift gradually to pessimism, amplifying the volatility of major asset classes.

Looking at data from the past 25 years, assets such as the US dollar, US Treasuries, core foreign bonds, and gold often play a "safe-haven" role during recessionary periods.

Historical data indicates that within two years after the end of a rate hike cycle, US Treasuries have consistently performed well. Across the past seven cycles of Federal Reserve rate hikes, the overall performance of US Treasuries has been favorable, with longer-duration bonds exhibiting better results.

2.Rise in US Treasury Yields, Enhanced Cost-Effectiveness of Long-Term Bond Allocation

Examining the trend of US Treasury yields, the market was initially overly optimistic about the Federal Reserve cutting rates, causing the yield on 10-year US Treasuries to temporarily drop to 3.8%. However, following the Federal Reserve's stance in the January FOMC meeting that there would be no rate cuts in March, coupled with unexpectedly high US inflation data and a resilient labor market, the market's expectations of rate cuts continued to be disappointed, leading to a significant increase in US Treasury yields.

Data Source: Fed Watch

Based on past experiences, when the market expects fewer rate cuts, opportunities to purchase long-term Treasuries arise. With the current rise in the US Treasury yields back above the central level, the prices of US Treasuries have retraced somewhat, presenting an opportune moment to take advantage and gradually allocate more long-term Treasuries.

3.Slow Cooling of the Job Market, Potential Gradual Decline in Inflation Data

Employment data often provides insights into the subsequent trends of inflation. Due to factors such as population loss and reduced immigration during the pandemic, a portion of the workforce has permanently exited the job market, creating a substantial labor gap that is challenging to rapidly repair. Simultaneously, post-pandemic economic recovery has led to a rapid increase in labor demand, pushing wage growth upwards due to excess demand, thereby supporting resilient inflation.

Data Source: Bloomberg

However, the Federal Reserve's persistent high-interest rates have to some extent suppressed corporate demand for labor. As the labor gap gradually narrows and job vacancy rates show a declining trend, labor market tension has eased somewhat.

Data Source: Bloomberg

With the slow cooling of the labor market, the sticky support for inflation will likely weaken, and subsequent inflation is expected to gradually decline, creating favorable conditions for the upward movement of long-term Treasuries prices.

Let's summarize:

The 10-year US Treasury yield, CPI, and PCE, these three core indicators, are worthy of our continuous attention.
During a rate-cutting cycle, long-term Treasuries tend to perform better.
With the rise in Treasury yields and the corresponding decline in bond prices, the opportunity to purchase long-term Treasuries have arrived.
Subsequent inflation is likely to decline, and the continued expectation of rate cuts will favor long-term Treasuries.

Finally, how should one go about purchasing long-term Treasuries?

It's straightforward. Open the Tiger Trade app, click on "Quotes," then select "Wealth," followed by "US Treasury." Choose a maturity period of >36 months, and you will see a list of long-term Treasuries. Just choose the one that aligns with your preferences from the list.

Source: Tiger trade app

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