Benefits of Diversifying Your Portfolio with US Bonds: So, you know, stuff’s been going down in the world lately. We’ve seen some pretty crazy geopolitical clashes like the Israel-Gaza showdown and that whole Russia-Ukraine thing. And guess what? It’s got the financial markets all shook up!

Now, for us young investors in India, we’ve mostly been keeping our eyes on local investments, right? But here’s the deal – that might not be the best move. It’s time to think bigger and global. Why? ‘Cause it’s all about diversification.

Diversification is like the secret sauce in your investment burger. It helps you spread out the risk so that if one thing goes south, you don’t lose everything. Makes sense, right?

So, let’s talk about this global vibe. We’re talking about investing in stuff from all around the world. And one way to do that is by looking at global fixed income securities. These things are like those safety nets that catch you when you fall – in the world of investing, of course.

See, by investing in global fixed income securities, you’re spreading your money out across different countries and markets. It’s like not putting all your snacks in one bag, just in case you get hungry in different places. It reduces your risk, man!

Here’s the deal: the world is a big place with lots of opportunities. And if you’re only focusing on your own backyard, you might be missing out. Global markets offer diversity, and they can be your ticket to managing risks more effectively.

So, in a nutshell, it’s time for us Indian investors to think globally and consider stuff like global fixed income securities. It’s all about making our investment portfolios more badass and resilient. So, let’s go out there and rock the global investment game! 🌎💰✌️

The Appeal of US Treasuries

One key avenue for diversification is investing in US treasuries, which are gaining traction as an alternative to traditional risk assets. The expectation of rising interest rates in the United States makes US treasuries an attractive option for investors seeking stability. To understand this, let’s delve into the concept of earnings yield.

Understanding Earnings Yield

The earnings yield, essentially the inverse of the price-to-earnings ratio (P/E), is a valuable metric for investors. It provides insights into the return on investment concerning a company’s earnings for each dollar invested in the market. Currently, the earnings yields of the S&P 500 and Nifty are converging at approximately 5%, marking the narrowest gap seen in almost two decades.

Nifty vs. US Treasuries

Nifty’s earnings yield stands at 4.5%, while a 1-year US treasury note offers 5.43% as of October 9th. This convergence signifies an intriguing development where bonds are now providing a substantial challenge to stocks as an investment choice. Indian investors are increasingly presented with a plethora of alternatives, often referred to as ‘TAMA’ – ‘There Are Many Alternatives’ – thanks to the allure of high-risk-free interest rates.

Sovereign Guarantee

With the US Federal Reserve on a rate-hike spree, 1-year US treasury yields have climbed up from 0.38% in 2022 to 5.59% in October. This makes it an opportune time to invest in US debt, especially in the 0-1 year segment, which offers the highest yields. Furthermore, when accounting for rupee depreciation, Indian investors can potentially gain an additional 4-5% on their dollar-denominated returns. The long-term trend has shown the rupee’s depreciation against the dollar, making US treasuries an appealing choice.

Narrowing Yield Gap

While US treasuries traditionally traded at lower yields than Indian government debt, the gap between the two has been narrowing. This yield gap has reduced from around 400 basis points (bps) to 164bps since January 2022. The US sovereign debt, boasting a high-quality AA+ rating, compares favorably to India’s BBB- rating, as assessed by Standard & Poor’s.

Exploring Investment Opportunities

One way for Indian investors to access US treasuries is through the Bandhan US Treasury Bond 0-1 year Fund of Fund (FoF). This fund invests in JPMorgan BetaBuilders US Treasury Bond 0-1 year UCITS ETF, an exchange-traded fund with exposure to 0-1-year US treasuries.

The FoF provides Indian investors with an opportunity to create a USD asset for funding near-term expenses. It offers high-quality US government securities with a short maturity period, ensuring low-volatility investment opportunities. With a modified duration of only 0.30, it is ideal for those seeking a USD asset without exposing themselves to equity market-related volatility.

Investing via US Bonds ETFs

Investors can also access US treasuries through international ETFs via domestic or international brokers. However, it’s essential to consider associated costs, such as fees, withdrawal charges, currency transfer costs, and impact costs (bid-ask spread). This investment typically falls under the Reserve Bank of India’s Liberalized Remittance Scheme (LRS), allowing Indians to remit up to $250,000 per financial year. However, a recent budget proposal has increased the tax collected at source (TCS) from 5% to 20% since October 1st, 2023.

Custom Created Bond Baskets

Looking ahead, Indian fintechs are exploring the concept of global custom-created bond baskets, offering diversification in terms of geographies and maturities. These baskets may include primary issuances of international bonds and aim to provide investors with even more diversification options.

Caution

While fixed income investments are generally perceived as safe, venturing into international markets increases the compliance burden. Additionally, using new brokers can introduce platform and execution risks. It’s crucial for investors to conduct thorough due diligence before making international investments.

In conclusion, the recent geopolitical disturbances have prompted Indian investors to rethink their asset diversification strategies. Embracing global markets, particularly through US treasuries and innovative investment vehicles, offers a compelling solution to enhance diversification and manage risks effectively.

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