Interest rates pivot? How to buy US Treasury Bonds

The release of the March Producer Price Index on Thursday and weekly jobless claims data showed some softening in the labour market. Total PPI rose 2.7% year-over-year versus 4.9% in February while core-PPI, which excludes food and energy, rose 3.4% year-over-year versus 4.8% in February. Initial claims for the week ending April 8 increased by 11,000 to 239,000 (consensus 236,000) and continuing claims for the week ending April 1 decreased by 13,000 to 1.810 million.

Market participants are now pricing in another 25 bp hike at the May 3rd FOMC meeting at 66% probability, while 34% think there will be no hike, according to the CME FedWatch tool.

How to profit from rate cuts? Treasury bond ETFs

If you browse the Tiger trade app, go to the Global tab on the top and you can see the treasury bonds yield.

I also have my treasury yields on my TradingView watchlist, ranging from 3 months to 30 years. Note the 3 month currently is 5.067%, which is close to the current Fed funds rate, while 2 year is 3.969%, 10 year is 3.447%. This implies the bond market believes in 2 years, the interest rates would be lower than what the Fed funds rate is, aka rate cut.

When rates get cut, the value of existing bonds rise. And how do you profit from this rise in bond values? Buy US Treasury bond ETFs.

The above shows the TLT (iShares 20+ Yr Treasury Bond ETF) price return for the last 5 years. Prior to 2022, the TLT has given positive return, but when interest rates were hiked aggressively last year, bond prices suffered. Just look at SVB'S bond portfolio. 

In the long run, the SPY would outperform the TLT, but having a portion of your portfolio in bonds will allow for some balancing. Traditionally, fund managers have always advocated a 60-40 stock to bond portfolio, where if stocks fell, bonds may rise to help cushion the fall. Of course that would have tanked in 2022, where stocks and bonds also fell together. 

The TLT has likely bottom at end of October 2022, and has entered a trading range between $100 & $110 levels. The TLT pays dividends at the start of every month too. 

EDIT: Do note that for dividend payments, if you are from Singapore, there will be a 30% withholding tax, just like any dividend paying stocks in the US markets.

Bond ETFs on my watchlist include the following:

$iShares 20+ Year Treasury Bond ETF(TLT)$ 

$SPDR S&P 500 ETF Trust(SPY)$ 

$iShares Core U.S. Aggregate Bond ETF(AGG)$ 

@TigerStars