Expert's View 名家觀點


七月 1 , 2018  

Should We Still Allocate to US Treasuries?


by Charles Cheng, CFA
鄭又銓, CFA



Since hitting a low of 1.32% on July 5th, 2016, the benchmark 10-year US Treasury Bond yield has risen steadily for almost two years to its current level of around 2.9%. Many financial market commentators in recent years have pointed out that it appears to be the end of the 30-year bond bull market which started in 1981 when interest rates were over 15%. US Treasuries have long been an important component of both global and US asset allocation strategies, from classic 60-40 stock-bond allocations to risk parity strategies where a third to half of the portfolio risk could be allocated to Treasuries. In this environment, one may wonder if investors should be switching out of their US Treasury allocations. While we do believe that the return prospects for US government bonds are currently limited, we believe that Treasuries can still play a number of important roles in many investors’ portfolios even in a rising rate environment:




10 year US Treasury Yield, 2013-2018


Source: Bloomberg



Treasuries are one of the few natural hedges against recession and disaster risk



If equities are the bulk of your portfolio, like most investors, the biggest risk to your assets is still a recession. Out of the last ten bear markets in US stocks, ten were the coincident with economic recessions or depressions. Typically, in order to counteract an economic slowdown, central banks will cut interest rates, increasing the value of existing bonds, making US government bonds one of the few global assets that will increase in value reliably during a recession. During the market fall in the Global Financial Crisis between October 2007 and February 2010, the Bloomberg US Government 7-10 year Treasury index returned around 17% compared to a market fall of over 50% for the S&P 500 Index.




Treasuries have the lowest credit risk out of major asset classes



While many investments are marketed as having a “capital guarantee”, most have a credit risk component to them, whether it is regarding the solvency of a corporate issuer or a bank that is issuing a structured product. Outside of bank deposits that are insured by a stable country’s government, Treasury bonds are the next best in terms of having negligible credit risk (often they are regarded as having no credit risk for a US dollar investor but with politics, anything can happen). For investors with imminent expenses on a fixed horizon, such as expected payments for child education, a fixed term bond investment with no credit risk secures the capital needed for the future.




Treasuries can still give positive returns during a long-term rate upcycle



While a dramatic inflation shock and rate rise will hurt all assets, and especially intermediate to long term bonds, outside of this scenario, rising rates and yields don’t necessarily mean capital losses for government bond allocations. As long as interest rate increases are not too sudden, investors can still get a positive return from intermediate dated bonds during a long-term rate hiking cycle, from the initial yield to reinvested proceeds at higher yields. A study done by asset manager AQR Capital for their risk parity strategy found that between 1947 and 1979 when US 10 year note yield went from 1.8% to 9.4%, bonds returned a positive 4.2% per annum.

雖然劇烈的通貨膨脹衝擊和利率上升會使所有資產受影響–特別是中長期債券–但在此情況之外,利率和收益率上漲並不一定意味著政府債券類別會有資本損失。只要利率上升不是太突然,從初始收益率到更高收益率的債券再投資,投資者仍可以在長期利率上漲週期中從中期債券獲得正回報。資產管理公司AQR Capital對其風險平價策略進行的研究發現,1947年至1979年間,當美國10年期債券收益率從1.8%變為9.4%時,債券回報為正值,年化4.2%。



10-year US Treasury Yields, 1926-2013


Source: AQR Capital, “Can Risk Parity Outperform When Rates Rise?” July 2013



While government bonds typically have a lower yield than other investments like corporate and municipal bonds, having them in your portfolio may enable you to buy more of other assets like equities during a market downturn than you would have otherwise while keeping a similar overall risk profile. In this way, even a slightly negative return to government bonds can still result in higher returns overall when combined with the rest of your portfolio.




It’s very unlikely that going forward, US Treasury performance will be as good as it has been in past decades. But by taking a portfolio approach, it’s possible to have both a muted outlook about the return prospects of assets like US treasuries and benefit from allocating some of your investment risk to them.




Mr. Cheng is a managing partner at Clarity Investment Partners, a Hong Kong based independent private investment office.