Earn up to 5.27% yield to maturity on US Treasuries. Good alternative to T-bills?

This post was created in partnership with Moomoo SG. All views and opinions expressed in this article are Beansprout's objective and professional opinions. 

What happened?

US government bond yields have rebounded strongly in recent months. 

With inflation staying more persistent than expected, investors are increasingly expecting that the US Federal Reserve will keep interest rates elevated. 

For example, the US 1-year government bond yield climbed to close to a year-to-date high of above 5.2% from 4.8% at the start of the year. 

This has also lifted the yield on the latest 6-month Singapore T-bill to 3.76%. 

As a result, I received questions in the Beansprout Telegram group on how we can buy US Treasuries as an investor in Singapore, and if they are a good alternative to the Singapore T-bill. 

In this article, I will be diving deeper to understand more about US Treasuries, and how to buy them in a simple way.

What are US Treasuries and are they a good alternative to Singapore T-bill?

US Treasuries are government debt securities issued by the US Department of the Treasury to raise funds for infrastructure spending, project financing and other government operating expenses.

They are fully backed by the US government and are widely considered to be low-risk investments.

There are a few reasons why investors consider US Treasuries.

#1 - Attractive yields compared to Singapore T-bill

US Treasuries offer attractive yields, with the yield to maturity of the Treasury Note maturing in January 2025 at 5.27% as of 31 May 2024.

The Treasury Note maturing in February 2025 has a yield to maturity of 5.25% as of 31 May 2024.

If you have idle cash denominated in USD sitting around, you can earn a higher yield and allow your savings to work harder. 

The US Treasury yield is also above the yield on the 6-month Singapore T-bill of 3.76% and the yield on the 1-year Singapore T-bill of 3.58%.

#2 - Relatively safe investments

US Treasuries are seen as relatively safe investments because they are guaranteed by the creditworthiness and debt repayment ability of the US government.

As a result, credit rating agencies have also given them one of the highest credit ratings, above that of other developed markets such as Hong Kong, United Kingdom and Japan. 

The market for US Treasury securities is also one of the largest and most liquid government securities markets in the world.

#3 - Stable returns

US Treasuries offer investors with a stable and consistent return, as the yield-to-maturity is fixed at the point of purchase.

Moreover, they can also provide a consistent flow of payment coupons.

For example, US Treasury Bonds typically provide a fixed interest payment twice yearly, offering investors a stable and consistent cash flow.

If you invest US$20,000 in US Treasury bonds with a 10 year maturity date and coupon rate of 4.5% p.a., you can receive US$450 every 6 months until maturity.

How to buy US Treasuries?

Moomoo SG recently started offering users the ability to buy US Treasuries on its platform. 

You can invest in US Treasuries with as little as US$1,000.

The types of US Treasuries on Moomoo SG include US Treasury Bills (T-bills), US Treasury Notes (T-Notes), and US Treasury Bonds (T-Bonds).

What are the risks of US Treasuries?

While US Treasuries are seen to be relatively safe investments, there are still several risks we need to be aware of.

#1 -  Interest rate risk

Interest rate risk is basically the risk that the value of your fixed-income investment will decline due a rise in interest rates.

Hence, you may incur a capital loss if the US Treasuries are sold prior to maturity.

Investors who may require the liquidity will need to bear this in mind before buying US Treasuries.

In this case, US Treasuries with a maturity of 6 months or 1 year may be considered for investors who would prefer a shorter holding period. 

#2 - Foreign currency risk: Denomination in USD

Foreign currency (FX) risk refers to the risk of losses arising from exchange rate fluctuations.

If you are planning to convert your USD back to SGD after the maturity period is up, you need to be aware of FX risk.

Imagine if you invest S$20,000 into a 5.2% US 1 Year Treasury Bill.

First you would need to convert the S$20,000 into USD, before converting the principal + interest back into SGD at the end of the 2 years.

But you may not get back S$21,040 (inclusive of the 5.2% interest) if the SGD has appreciated against the USD during those 12 months.

In other words, your returns may be less than 5.2%.

As the US Treasuries are denominated in USD, non-US investors will be subject to fluctuations in the exchange rate, hence affecting returns.

What would Beansprout do?

US Treasury yields have risen in recent months with strong US economic data and persistent inflation.

As a result, US Treasuries can offer an attractive yield to maturity on our idle cash denominated in USD. 

However, we would need to be mindful of the interest rate risks and currency risks when investing in US Treasuries. 

The interest rate risks would be mitigated if we hold the Treasuries till maturity, and the exchange rate risks would be less of an issue if we already have USD denominated idle cash that we do not plan to convert back to Singapore dollar in the near future. 

If you are looking to invest in US Treasuries, Moomoo SG allows you to buy them easily from as little as US$1,000.

From now until 30 September 2024, Moomoo SG will be waiving commissions on US Treasuries. T&Cs and other fees do apply. 

Join the Beansprout Telegram group for the latest insights on Singapore stocks, REITs, bonds and ETFs. 

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