The Treasury Edge: Beating savings accounts with smarter choices

Time to Ditch Your Bank for Bonds?

The Big Shift: Investors Swap Dividend Stocks for Treasury Bonds

Real returns from bonds are the best they've been in 15 years. This makes them a super attractive part of any investment portfolio. The head of the Federal Reserve, Chairman Powell, recently confirmed that interest rates are likely to stay high for a while to help stabilise the economy.

Beyond the Banks: Big Players Bet on US Treasuries

Now, there's a golden opportunity for investors to lock in great returns with US Treasury Bills (T-Bills) and Bonds, compared to traditional fixed deposits (FDs). Why? Because FDs depend on the financial health of the bank, and with recent bank failures in March 2023 resulted in investors pulling out of bank deposits at a swift pace and snapping up $48.4 billion worth of US T-Bills

Even the big players are seeing the benefits. Major US banks aren't offering great returns on deposits, while treasuries are doing much better. For example, Berkshire Hathaway upped its T-Bill investments by 30 per cent, reaching $126 billion recently. Likewise, Stanley Druckenmiller also built up his bullish bets on two-year notes in recent months.

Weighing Risk and Reward

If you're willing to take a bit more risk, you might consider treasury bond futures, like the US T-Bond Ultra or the Euro Buxl. These are different from T-Bills because they have a fixed end date, while T-Bills come in various lengths to suit your investment plan.

With the stock market looking uncertain – only half of the S&P 500 companies have met revenue expectations - it's a good time to think about including safe, high-yield treasuries in your portfolio. The Bloomberg ECO US Surprise Index has fallen considerably, signaling fewer positive surprises in economic data. Amidst such heightened uncertainty, investors would be well-advised to park their funds in a basket of high-yielding safe haven treasuries

Europe's Economic Woes: High Yields Amidst Recession Risks

The story is similar in Europe, where the economy is slowing down and facing recession risks. The European Central Bank (ECB) has kept interest rates at four per cent, the highest since the Euro started in 1999. The 30-year treasury yield surpassed five per cent for the first time since the initial days of the Global Financial Crisis in 2007. The 10-year German government bond yield surged to a 12-year high at 2.98 per cent. Likewise, Italy’s 10-year government bond yield soared to a 11-year high at 4.956 per cent. Although treasury yields have moderated slightly since then, they remain supported after the ECB delivered a hawkish pause. Moreover, ECB President Christine Lagarde said the central bank would not slash rates for at least the next couple of quarters. This presents a lucrative opportunity for investors to capture the high yields on European treasuries.

Fixed Deposits or T Bills, what's in for investors?

Investors who are looking for a par investment should choose a US T-bill with a duration that is appropriate for their investment goals. For example, Investors with a lower risk tolerance may prefer shorter-duration US T-Bills, which offers greater liquidity and lower exposure to interest rate fluctuations. If an investor is willing to lock up their money for a longer period of time, they may be able to earn a higher return by choosing a US Treasury Bond with a longer duration.

On the front of returns, the average yield for Fixed Deposits for a period of 1-year ranges from 3.5 per cent to 4.5 per cent, while US 1-year Treasury bills offer a more enticing 5.25 per cent. The superior appeal of US Treasury bills is further accentuated by their high liquidity, seamless tradability in the secondary market, and the robust backing of the US government. Fixed deposits are currently contended with limitations on liquidity, and withdrawing funds prematurely may result in penalties.

The United States witnessed its interest rates reaching a 22-year high, fluctuating between 5.25 per cent and 5.50 per cent. This substantial level is anticipated to remain stable as the Federal Reserve adopts a cautious strategy to bring inflation down to its targeted two per cent. Projections indicate that US Treasury yields will plateau at least through the first quarter of 2024. A momentary pause as the labor market exhibits signs of cooling.

The diversification potential offered by US Treasury bills and bonds is a noteworthy advantage. During a globally unstable economic landscape, the inherent strengths of US Treasury bills emerge as a beacon of stability and potential returns.

Why Invest in Bonds?

How do bonds work?

When you buy a bond, you're lending money to the issuer. They promise to pay you periodic interest payments and return the principal amount at the bond's maturity date. Let’s understand this using an example:

Face Value:

This is the bond's par value or the amount you'll get back once the bond matures. In our example, it's $1,000.

Coupon Rate:

This is the interest rate that the issuer agrees to pay the bondholder at a predetermined frequency, say annually or semi-annually. With a five per cent coupon rate per annum, Company XYZ agrees to pay you five per cent of the bond's face value every year. So, you'll receive $50 (five per cent of $1,000) annually.

Maturity Date:

This is the date when the bond will expire, and the issuer will return the face value to the bondholder. In our scenario, Company XYZ will return your $1,000 after 10 years.

How to invest in Bonds in UAE?

As we navigate through a landscape of towering interest rates and market volatility, the allure of US Treasury bonds and bills has never been stronger. With a seasoned ally like Century Financial, who has been guiding investors through the ebbs and flows of the bond and treasury markets for over three decades, their expertise can help you in identifying a high-yield potential of treasuries, offering a beacon of stability as you diversify your portfolio away from the uncertainties of the banking sector.

Disclaimer: Trading in financial markets carries a high risk of losses which can exceed deposits and may not be suitable for all investors.