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Widely regarded as some of the safest investments globally, U.S. Treasuries are debt securities issued by the U.S. Department of the Treasury to finance the government’s spending.
Backed by the full faith and credit of the U.S. government, treasuries are considered “risk-free” and often used as a reference point when evaluating the risk of other bonds, such as corporate and municipal bonds.
For Singaporean investors, U.S. Treasuries can be attractive, particularly for those seeking stable income. In the current interest rate environment, U.S. Treasuries can offer yields of 5% or more, which is higher than the 3-4% range typically provided by Singapore government securities.
However, while both U.S. Treasuries and Singapore government securities are considered risk-free debt instruments, simply opting for the higher yield isn’t the only consideration. In this article, we will outline 5 key factors that Singaporean investors should consider before investing in U.S. Treasuries.
#1 Purpose For Investing In U.S. Treasuries
Firstly, you should ask yourself what is your reason for wanting to invest in U.S. Treasuries.
Higher Income Yield: Treasuries are renowned for their predictable and reliable income, making them particularly appealing to those seeking steady cash flow, such as retirees or income-focused investors. With U.S. Treasury yields currently offering higher returns than Singapore government securities, they present an attractive option for those looking to enhance their fixed-income portfolio.
Diversification: U.S. Treasuries can also serve as an instrument for portfolio diversification. For investors with portfolios largely concentrated in equities, U.S. Treasuries provide bond exposure. Bonds are considered safe-haven assets compared to growth assets like equities and, therefore, offer stability during periods of slowing economic growth or recession.
Trading Opportunities: Some investors may approach U.S. Treasuries not only for their safety and income but also for the potential trading opportunities they present. Since Treasury prices are sensitive to interest rate changes, traders can capitalise on these price movements, potentially profiting from their positions.
#2 Investment Time Horizon
While all U.S. Treasuries are backed by the U.S. government and considered some of the safest investments available, it would be incorrect to assume they are all the same.
The key differentiating factor when considering U.S. Treasuries would be their maturity period. For example, if you purchase U.S. Treasuries from the primary market (i.e. from the U.S. Department of the Treasury), you can choose tenors of 1, 2, 5, 10, 15, 20, or 30 years.
In the secondary market where U.S. Treasuries are traded, debt securities with varying maturity periods are found. The maturity period affects the bond’s price movement. Shorter maturities offer greater liquidity, while longer maturities may provide higher yields but come with increased exposure to interest rate risks.
Through the moomoo platform, investors can select U.S. Treasury products across various maturities. This flexibility is crucial, as it allows us to align our financial goals and investment horizon with the appropriate type of Treasury product, optimising returns based on our intended holding period.
#3 Interest Rate Fluctuations
One of the most important factors to consider when investing in U.S. Treasuries is their sensitivity to interest rate changes.
The value of Treasury bonds moves inversely to interest rates—when rates rise, the price of existing bonds falls. This occurs because newer bonds are issued with higher yields, making older bonds with lower yields less attractive in comparison. For investors needing to sell their bonds before maturity, this could result in capital losses.
Understanding the current interest rate environment is crucial for Singaporean investors. The U.S. Federal Reserve’s monetary policy plays a key role in determining the direction of interest rates. If the Fed is expected to raise rates, holding long-term Treasuries could be risky, as the value of those bonds would likely decrease. On the other hand, if rates are expected to remain stable or decline, long-term Treasuries might offer the potential for both steady income and capital gains.
Platforms like Moomoo provide up-to-date analysis and insights on interest rate movements, helping investors stay informed about market conditions. By carefully assessing the interest rate outlook, investors can make more informed decisions about which Treasury products to invest in, balancing the desire for higher yields with the risks posed by rate fluctuations.
#4 Foreign Currency Exchange Rate
A critical factor for Singaporean investors to consider when investing in U.S. Treasuries is the impact of foreign currency exchange rates. Since U.S. Treasuries are denominated in U.S. dollars, any fluctuations in the USD/SGD exchange rate can affect the overall return on investment.
Thus, even if U.S. Treasuries offer higher yields than Singapore government securities, a weakening U.S. dollar against the Singapore dollar could reduce or negate potential gains.
For example, if the U.S. dollar depreciates against the Singapore dollar after you’ve invested, your returns, once converted back to SGD, may be worth less than anticipated. This exchange rate risk is important, especially for long-term investors, as currency markets can be volatile and unpredictable over time.
Tools like Moomoo’s currency conversion features and real-time exchange rate data can help investors track the currency market and make informed decisions on when to enter or exit U.S. dollar investments, potentially mitigating the impact of unfavourable exchange rate movements.
#5 Understanding Yield-To-Maturity (YTM)
Yield-to-Maturity (YTM) is a key metric that provides a comprehensive view of the total return you can expect from a U.S. Treasury or any bond if held until maturity.
YTM takes into account several key factors: 1) the bond’s purchase price, 2) the periodic interest payments (coupons), and 3) the time remaining until maturity. YTM represents the annualised return you will earn if the bond is held to maturity, assuming all payments are made as scheduled.
For investors, comparing the YTM of a Treasury bond with their required rate of return is crucial. If the YTM falls short of your financial objectives, the bond may not fit your portfolio best, even if it offers stable returns. Conversely, if the YTM aligns with or exceeds your expectations, it indicates that the bond could be a suitable investment.
Moomoo’s bond screener and comparison tools simplify this process by allowing investors to assess and compare different Treasury products based on their YTM. This helps ensure that the selected investment aligns with their overall financial goals. By using these tools, investors can make more informed decisions and select U.S. Treasuries that not only fit their risk tolerance but also meet their return expectations.
Invest in U.S. Treasuries through Moomoo
U.S. Treasuries offer an appealing combination of safety, liquidity, and steady returns, making them a popular choice for risk-averse investors. However, despite being seen as risk-free investments, investors should carefully weigh their individual goals, time horizons, and potential risks before committing to these securities.
Through the moomoo platform, we can easily access and invest in a wide range of U.S. treasury products. We can also deploy investment strategies such as bond laddering to ensure that we have a bond portfolio with bonds maturing across several months or years, so that we can regularly reinvest our bond principal when they mature into newer bonds.
To get started, simply download the moomoo app from the App Store or Google Play, open a moomoo account and you can start investing in U.S treasuries as well many other investment products and solutions.
Check out their latest promotion here.
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