US Treasury Bond ETFs

george4064

Does anyone hold a US Treasury Bond ETF?


They seem to be quite a good cautious investment, backed by the full faith of the US government.


I know its very boring, but it seems relatively simply and safe against recession whilst returning significantly more than cash (e.g. 1.5% Marcus).


7-10 year US Treasury Bonds: https://www.hl.co.uk/shares/shares-search-results/i/ishares-ii-plc-usd-treasury-bd-7-10


20 year + US Treasury Bonds: https://www.hl.co.uk/shares/shares-search-results/i/ishares-iv-plc-usd-treasury-bond-20-year


N.B, I'm prepared to be shred apart my bowlhead99, but I'd love to hear people's views and perhaps further insight into these US Treasury ETFs*

MaxiRobriguez

They return more than cash because they come with higher risk.

What are you going to do if interest rates slowly increase over the next ten years and you're holding a portfolio of which the majority of the yield was bought when rates were at record lows?

I'm avoiding bonds at the moment. If interest rates stay low I want to be in equities, if interest rates go up I want to be in cash.

Reaper

george4064 wrote: »

I know its very boring, but it seems relatively simply and safe against recession whilst returning significantly more than cash (e.g. 1.5% Marcus).

Sounds very poor to me. I just checked the first one and the yield is 2.49%. That's only a very small improvement on a savings account considering the value of the capital can fall if interest rates rise.

george4064

Reaper wrote: »

Sounds very poor to me. I just checked the first one and the yield is 2.49%. That's only a very small improvement on a savings account considering the value of the capital can fall if interest rates rise.

True but it seems that US Treasury Bonds is a good place to be invested in the event of a recession as investors run to them for safety and security, and some would expect them to increase in value if there were volatility markets.

pinkllama

Isn’t holding unhedged $ bonds a bet on currency movements more than anything else?
I’ve got 50% of my bonds in Vanguard $ Treasury Bonds VUTY and 50% in Vanguard Global Bond Index £ Hedged.

If Brexit goes well I’ll probably lose a bit, if it goes badly I’ll gain a bit.
At some point I want to have all my bonds £ hedges.

bowlhead99

george4064 wrote: »

Does anyone hold a US Treasury Bond ETF?

They seem to be quite a good cautious investment, backed by the full faith of the US government

N.B, I'm prepared to be shred apart by bowlhead99, but I'd love to hear people's views and perhaps further insight into these US Treasury ETFs*

You have probably seen my comments on other threads which note that the market values of long-dated UK gilts could fall heavily over time if there were to be significant increases in interest rates, so 'safe government-backed stuff' doesn't mean you won't lose money. That sort of comment would apply primarily to the fund in your second link where the bonds don't mature for 20 years plus and so are strongly affected by dollar interest rate changes.

However, if US interest rates do go up faster than the market expects them to, and UK rates don't follow suit at the same pace, one might expect dollars to strengthen against pounds sterling (as higher rates in the US creates demand from foreigners to buy dollars).

This could give you some downside protection because even though the long dated bonds held by the ETF are worth fewer dollars (as they have become less attractive due to the interest rates they pay becoming relatively uncompetitive), each of those dollars is worth more pounds (as USD has strengthened against sterling).

To avoid "shredding apart" your ideas, I'll simply say that the following comment "may be a bit naive":

I know its very boring, but it seems relatively simply and safe against recession whilst returning significantly more than cash (e.g. 1.5% Marcus).

The 3 main things to be aware of when investing in debt are:

- 1) What are the chances it will pay you out: 'credit risk' or 'risk of default';

Well, you never know with Trump, but generally the US government can be assumed to be good for its debts as they fall due. They might print so many dollars that each dollar is relatively worthless, so holding government bonds is not necessarily smart when inflation rises, but they are generally not going to have a problem staying solvent and will be able to pay the interest and principal at maturity.

This means you are partly right that they could survive a recession. Actually in a US low-inflation recession the bonds held by the ETF will be quite desirable as interest rates may fall further, perhaps to negative rates levels if Trump's appointees at the Federal Reserve help him out politically and cut rates as hard as possible while increasing QE.

- 2) What will it be worth if you don't hold until maturity: 'market risk';

You are not holding an individual 7 or 10 or 30-year bond, collecting the interest rate and getting the principal back at the end. Instead your ETF is buying a load of bonds according to the index mixture, and selling them off piecemeal when the bonds get too close to maturity (ie bonds with under 7 years to run, or under 20 years to run, will be sold by the ETF manager as they fall out of scope for inclusion in the respective product).

So, market prices matter when the ETF delivers its long term return, and they also matter to you personally because you might not be planning on holding forever and you may want to exit the whole product at some point. The fact that the market prices in dollars for bonds of this risk profile are $x now and might only be worth $0.75x if interest rates were higher, is obviously a risk that can wipe out any 'nice yield' you earn in the meantime. Because the value of the bonds - and the price of the ETF -at a point in time, is all about market conditions.

Permanent losses are easily possible given the bond manager will sell bonds that fall out of scope, entirely outside your control, and you yourself will probably want to sell the fund at some point - albeit the timing of that is inside your control, but the price in a given year, isn't.

-3) What is a dollar bond or a dollar income worth in pounds from time to time: 'currency risk';

Even if you have come to terms with 1 and 2, i.e. you are happy the credit risk is low and don't care about market risk of the dollar government bond market, it is still a bit misguided to look at an asset priced in a foreign currency and think, "hmm, that interest rate, although it's not the currency I usually earn or spend in, is higher than what I get in a pounds sterling bank account, so it is a pretty good cautious investment..."

What about the fact that a collection of US bonds worth $125 today paying 2.5% ($3.13 a year) costs £100 today (because there are 1.25 dollars to a pound) but if sterling strengthens so that there are 1.5 or 1.6 dollars to a pound, the $125 bond collection will only be worth £83 or £78 respectively, and the $3.13 a year income stream is only worth £1.95.

In such a case, you would have paid £100 for an investment paying you under £2 a year, and if you wanted to sell it to someone else they would only be willing to pay you £80ish: 20% less than you had recently spent to buy it.

If you want to avoid such currency risk, some dollar ETFs are available as a special GBP hedged share class where they use clever financial techniques (which add cost and risk) to mitigate the exchange rate impact on your potential returns. At a glance it looks like the 7-10yr bond product is available as a GBP hedged class (London stock exchange ticker IGTM instead of IBTM) but the 20yr+ one is not (dollar or Euro-hedged only?).

However once you start looking into things like hedging currencies you realise that you might not want to hedge after all because some of the other issues you had previously got comfortable with, might rely on the currency effect being in place. For example if the US interest rates increase and the long dated bonds lose value in dollar terms, you would be glad of a positive currency effect from a stronger dollar to help reduce or avoid valuation losses in pounds. So taking a hedged share class that eliminated the currency effect would mean you were hit with that loss.


Conclusion:
Not a bad thing to hold if you fear a strong slowdown to global growth and you want dollar assets. But not such a good thing if the US crashes harder than everywhere else and dollars become worth fewer pounds, or if there is no crash and US interest rates go up and sterling strengthens too after a Brexit outcome; you could lose 30%...

Generally if foreign banks pay higher rates than UK banks you should expect to lose the difference back in changes to FX rates over time. However when your money is not in an insured deposit account but is instead an investment in foreign market-listed securities, you can still lose any gains to FX rates and you can make substantial losses too, even ignoring the FX rate bit.

I'm prepared to be shred apart my bowlhead99

I have been as kind as possible . The 'while returning significantly more than cash at Marcus' is clearly an illusion, given the potential volatility to the value of the asset and the value of the income stream, and risk of significant and permanent capital loss.

A_T

US Treasuries are the asset least correlated to equities - holding them is a great diversifier.

bd10

In my view, ETFs on UST can have two advantages:
(1) You can de facto convert GBP into USD at almost zero cost (well, the dealing charge really) which beats most FX providers. I would buy GBP denominated ETFs. (they behave like their USD counterparts but the ETF issuer is taking care of currency exchange rather than the investor potentially getting lumbered with foreign exchange surcharges by the platform provider)
(2) they are AAA debt and highly desirable, like Bunds with the difference that German Bunds have negative yield 10y out.
Before you buy, I would check what's the average maturity inside. The prospectus should say that, if not look up the underlying bonds. 2y tenors behave differently from 10+ years. So, that you have to consider what works best for your strategy. An ETF based on 2y T-Notes "feels" more like cash than a long dated bond portfolio which can swing with inflation, GDP numbers and other longer term macro events.
Having said that, the flight for safety in UST is now a bit of a crowded trade.
Also, look at the 10-year minus 3-months Treasury spread. You find the chart and data on FRED. Their database of great so you can see which tenors have performed better when the yield curve was inverted.
Lastly, I would not neglect/ignore global bond funds/ETFs. They can be an alternative to Treasuries. Stick with AAA rated sovereigns, minimise the exposure to countries like Italy and emerging markets. I would also stay clear of UK gilts as the UK is on negative outlook by the rating agencies. The other benefit would be you hold the investment not 100% in USD but a basked of various currencies.

george4064

Thanks for all the responses, always learning and hearing peoples' insights on this wonderful forum!