The yield on U.S. 10-year Treasury bonds has surpassed 5%, deepening concerns for long-term investors. As bond yields rise, prices fall, increasing the burden of unrealized losses for existing investors. However, the high yields present an opportunity for new investors to purchase bonds. With the potential for prolonged high interest rates due to U.S. fiscal pressures, careful consideration of investment timing and product selection is advised.
According to the Federal Reserve on October 22, the yield on 10-year U.S. Treasury bonds reached 5.12% as of October 20. The yield on 30-year bonds also soared to 5.42%. From March 1 to October 20, the yield on 10-year bonds increased by 1.17 percentage points, while the 30-year yield rose by 0.81 percentage points.
The sharp rise in yields is largely attributed to changes in expectations regarding U.S. monetary policy and fiscal pressures. Market expectations for short-term interest rates have increased, compounded by concerns over the deterioration of U.S. fiscal health and the expansion of long-term Treasury supply. There is also upward pressure on the 'term premium,' the additional yield investors demand for holding bonds over a longer period. These structural factors may keep high yield levels sustained for an extended period.
For domestic investors, the Bank of Korea's interest rate decisions also play a crucial role. The Bank's Monetary Policy Committee decided to maintain the base rate at 3.00% on this day, following two consecutive rate hikes in July and August. While there remains the possibility of further increases, the allure of high yields from U.S. Treasury bonds exceeding 5% is drawing investor interest.
So, is now a buying opportunity with long-term bond prices declining? One key factor to consider is 'duration,' which measures a bond's sensitivity to interest rate changes. For instance, a bond with a modified duration of 15 years could see its price drop by about 15% if market rates rise by 1 percentage point. Conversely, if rates fall, significant capital gains could be expected. Actual price fluctuations will vary based on the bond's characteristics.
Long-term bond exchange-traded funds (ETFs) are particularly sensitive to interest rate changes. If rates reverse and begin to decline, investors can anticipate gains from rising prices, but further increases could amplify losses. Existing investors may attempt to lower their average purchase price by buying more, potentially increasing their overall losses.
If the goal is to secure yields higher than capital gains, purchasing individual Treasuries directly could be an option. Holding individual bonds to maturity guarantees the agreed-upon interest and face value, even if market prices decline in the interim. However, actual yields will vary based on the purchase price, and selling before maturity could result in losses.
In contrast, typical long-term bond ETFs continuously replace bonds with longer maturities. Unlike individual Treasuries, they do not guarantee a specific repayment at maturity, making the market price at the time of sale crucial. If predicting interest rate direction is challenging, short-term bond ETFs, which generally exhibit lower price volatility, may serve as an alternative.
Exchange rates also significantly influence yields. Even if U.S. Treasury investments yield 5% in dollars, a 5% decline in the dollar's value against the won during the same period could negate most of the gains due to currency losses. To mitigate exchange rate risk, investors might consider hedging products, but they should also weigh the costs of such hedges.
Ultimately, investing in U.S. long-term Treasuries should not be based solely on current interest rates but should also consider the investment horizon and risk tolerance. For funds needed in the short term, short-term bonds may be more suitable. Conversely, for those with a longer investment horizon, a strategy of gradual purchases while accounting for the potential for further rate increases may be worth considering.
* This article has been translated by AI.
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