Mark Preskett: We are now three weeks into 2018 and already we’re seeing some significant moves in financial markets, not least with US Government bonds.
The 10-year US Treasury is now yielding 2.65% which is around half a percentage point higher than yields of September last year and almost double the 1.36% low reached shortly after the Brexit referendum.
Can we expect further rises? Perhaps, although factors that have kept bond yields low since the global financial crisis like low inflation expectations, aging populations, and overseas QE have not simply disappeared in 2018.
For a UK investor, the 2.65% yield represents a significant pick-up from the 1.4% we currently receive from buying a 10 year gilt. And in our portfolios, we have been actively taking exposure in US Treasuries via a Vanguard tracker.
It should be noted that the yield premium is lost if you account for the cost of hedging out the US dollar risk, but, in our view, the investment still makes sense from a risk-reward basis.
Investing in US Treasuries with a higher starting yield provides lower risk of capital losses from further rises in yields, should they come, and also greater opportunity for capital gains should markets begin pricing in recession/deflation.
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