I heard that you can buy U.S. Treasury bonds and retire early?

First, US Treasury yields have dropped to record highs, with the 5% ten-year US Treasury bond making its debut.

In the past week, with “buy US bonds for retirement” becoming a hot topic on social media, many friends have come to ask the financial expert if this is true.

The fact is, it is true!!!

Recently, US Treasury yields have surged to 5%, particularly for long-term bonds such as the 10-year, 20-year, and 30-year bonds. The interest rates for newly issued long-term US bonds have all soared to 5%. If one can buy US bonds recently and hold them until maturity, they can indeed earn an annual interest rate of 5%.

Recently, with strong economic data, US Treasury yields have risen across the board, with the ten-year US Treasury yield approaching 5%, marking a new high in many years.

On October 12, 2023, the surprising results of the 30-year U.S. Treasury bond auction in the United States forced primary dealers to take on 18.2% of the bonds that were not bought by other bidders, far exceeding expectations. The highest yield reached 4.837%, 50 basis points higher than expected. Long-term bond yields surged, causing concerns in the market about the sharp expansion of debt supply, attributed to reasons such as central bank selling, declining overseas demand, and reduced leverage buyers. Debt supply is expected to continue expanding, potentially impacting market liquidity.

A 5% yield on U.S. bonds has raised three issues:

1. For the public, holding these 5% U.S. bonds is simply too comfortable!!!

For the public, a 5% yield on U.S. bonds is quite substantial. This means that if one invests $1 million, they can earn $50,000 in annual returns. This income can be used for retirement, education, and other expenses.

Of course, U.S. bonds also come with risks. If the U.S. economy experiences a recession, the price of U.S. bonds may decline. Therefore, individuals need to be mindful of the risks when investing in U.S. bonds.

2. For funds, the annual benchmark must prove it can outperform the 5% yield on the 10-year U.S. bonds, otherwise, why not just buy U.S. bonds?

For funds, the annual benchmark must demonstrate it can outperform the 5% yield on the 10-year U.S. bonds. Otherwise, investors could directly purchase U.S. bonds for higher returns. Funds need to continuously strive to improve their investment returns to attract investors.

3. For value stocks, does dividend yield outperform the 10-year U.S. Treasury yield?

The pressure on value stocks has increased, balancing issues of dividend yield, growth, and debt levels. However, in the short term, it may exacerbate selling pressure on value stocks, as seen recently with significant selling pressure on stocks like Coca-Cola.

Secondly, when it comes to buying and selling US Treasury bonds, there are certain issues to be aware of. The notion of “buying US bonds for retirement” has its merits, but it also carries certain risks.

From the perspective of investment returns, US Treasury bonds have the following advantages:

• High security: US Treasury bonds are issued by the US government and have a high credit rating.

• Good liquidity: The US Treasury bond market is vast, ensuring ample liquidity.

• High yield: Currently, US Treasury bond yields are at historical highs, offering a high investment return.

Therefore, US Treasury bonds can serve as an investment tool for retirement planning, providing investors with stable cash flow and a relatively high yield.

However, investing in US Treasury bonds also comes with the following risks:

• Interest Rate Risk: An increase in US Treasury bond yields will lead to a decrease in US Treasury bond prices.

• Inflation Risk: A rise in inflation will result in a decrease in the real yield of US Treasury bonds.

• Exchange Rate Risk: If the US dollar depreciates, it will lead to a decrease in the investment return of US Treasury bonds.

Buying and selling US Treasury bonds is a relatively complex process involving multiple factors and considerations. Here are some key issues to consider when trading US Treasury bonds:

Interest Rate: The yield of government bonds is a key factor affecting their prices and investment returns. Generally, interest rates and bond prices are inversely related. That is, when interest rates rise, bond prices fall; when interest rates fall, bond prices rise. Investors need to closely monitor the Federal Reserve’s adjustments to interest rates, as well as other interest rate influencing factors in the market.

Inflation: Inflation can impact the real return of bonds. If the inflation rate is higher than the annualized yield of a bond, the real return of the bond may be negative. Investors should consider the impact of inflation and may seek bonds that provide inflation protection, such as Treasury Inflation-Protected Securities (TIPS).

Credit Rating: Although U.S. Treasury bonds are generally considered low-risk, investors should still pay attention to the credit rating of the U.S. government, as it may affect the price and attractiveness of bonds.

Maturity Date of Bonds: Bonds with different maturity dates may have different interest rates and prices. Typically, long-term bonds have higher interest rates than short-term bonds, but they may also come with higher interest rate risk.

Tax Implications: Interest income from U.S. Treasury bonds is tax-exempt at the federal level, but may be taxable at the state and local levels. Investors need to understand tax regulations and consider investment returns with tax implications in mind.

Liquidity: U.S. Treasury bonds generally have high liquidity, but under certain market conditions, or for certain types or maturity dates of bonds, liquidity may vary.

Purchase Channels: Investors can purchase U.S. Treasury bonds through various channels, including buying directly from the U.S. Department of the Treasury, or through banks, brokers, and online platforms. Understanding the advantages, disadvantages, and fee structures of different channels is crucial.

The most important aspects to focus on are the discount, premium, and yield of bonds, as they are closely related to each other. Below is a brief explanation of these three concepts:

Discount: When the market price of a bond is lower than its face value, the bond is considered to be sold at a discount. For example, if a bond with a face value of $1000 is priced at $950 in the market, then this bond is sold at a discount.

Premium: Conversely, when the market price of a bond is higher than its face value, the bond is considered to be sold at a premium. For example, if a bond with a face value of $1000 is priced at $1050 in the market, then this bond is sold at a premium.

Yield: The yield of a bond refers to the annualized rate of return on the bond investment. It is the ratio between the annual interest of the bond and its current market price. The yield is influenced by various factors, including market interest rates, bond credit ratings, and remaining maturity.

Relationship between discount, premium, and yield:

Discount and Yield: Generally, bonds purchased at a discount will have a higher yield. This is because investors pay a price below the face value, but can still receive the face value at maturity, resulting in a relatively higher yield.

Premium and Yield: Conversely, bonds purchased at a premium typically have a lower yield. This is because investors pay a price above the face value, but can only receive the face value at maturity, leading to a relatively lower yield.

Changes in Market Interest Rates: Fluctuations in market interest rates affect bond prices and yields. When market rates rise, the prices of existing bonds usually decrease, leading to higher yields; conversely, when market rates fall, bond prices typically rise, resulting in lower yields.

In the bond investment process, understanding the relationship between discounts, premiums, and yields, and how they are influenced by market conditions, is crucial for making wise investment decisions.

Investment Strategies:

Investors should clearly define their investment objectives, risk tolerance, and investment horizon in order to choose the most suitable types of bonds and investment strategies. Therefore, when investing in U.S. Treasury bonds, investors should pay attention to risk control and allocate their investments based on their own investment goals and risk tolerance.

Specifically, investors can consider the following points:

1. Implement a phased investment strategy to reduce investment risks.
2. Choose longer-term U.S. Treasury bonds to achieve higher yields.
3. Monitor the monetary policy trends of the Federal Reserve and adjust investment strategies in a timely manner.

If investors can effectively control risks, then “investing in U.S. Treasury bonds for retirement” is a good choice.

Here are some specific investment suggestions:

• Investors can invest in U.S. Treasury bonds through repurchase agreements with government securities. A repurchase agreement involves investors lending funds to banks, and the bank repaying the funds at a specified future date at an agreed interest rate. The yield of repurchase agreements with government securities is similar to U.S. Treasury bond yields, but with lower risks.

• Investors can also invest in U.S. Treasury bonds through purchasing U.S. Treasury bond ETFs. U.S. Treasury bond ETFs are index funds that track an index of the U.S. Treasury bond market. U.S. Treasury bond ETFs have lower trading costs and are suitable for small investors.

Investors should choose appropriate investment methods based on their investment objectives and risk tolerance.

Conducting risk assessment: Before buying or selling US Treasury bonds, investors need to conduct risk assessment to determine their risk tolerance.

Diversified investment: Investors can diversify their funds by investing in US bonds with different maturities and yields to spread risks.

Long-term holding: US Treasury bonds have high security, allowing investors to hold them for the long term and gain stable returns.

In fact, it is difficult to find long-term bonds with such high interest rates through general brokerage channels. Taking a certain brokerage as an example, it is rare to find a 4% Treasury bond portfolio on the APP. Here is a reference for you.

In addition, the U.S. Treasury bond ETFs have experienced a significant collapse in bond prices and are gradually entering the buying zone, long-term investors may consider gradually getting involved.

Chart of TLT trend:

The chart shows the trend of TLT (iShares 20+ Year Treasury Bond ETF).

As shown in the chart, the price of TLT has hit a new low since its listing.

In the current situation, investment, like Chinese enterprises, also needs to be globalized. Therefore, a more diversified asset allocation is crucial. The U.S. stock market remains the top choice. During the pullback, it is recommended to pay close attention to Nasdaq ETFs: 159632, 159941, 513100, 513300, and 513110 are all worth focusing on!!!