There are no flat assets, only suitable assets. Long-term U.S. Treasury bond rates are soaring again. The yield to maturity of the 10-year U.S. Treasury bond is 4.98%; the 30-year bond has reached 5.11%. ． ． What is the concept of 5% yield to maturity? This is the highest yield level in the United States in 16 years!
In comparison, domestic treasury bonds and insurance of the same term are both at 3%, long-term time deposits are mostly below 3%, and interest rates on financial management and certificates of deposit are both low and short-term. Perhaps only some disturbing trusts can come close.
So some people said that if you buy U.S. bonds for US$1 million, you will get a risk-free maturity return of 4.5% (currently more than 5%). You don’t have to do anything after buying it, and you can earn RMB 30,000 per month in 30 years, and you can rest easy.
This wave of operations, let alone ordinary people, even analysts and fund managers called it "really delicious".
This reminds people of the 3.5% scheduled return incremental life insurance that was very popular in the first half of the year. When financial products are shrinking and funds cannot be sold, their stable and high-yield characteristics have supported half of the wealth management needs of many institutions.
When did everyone start flocking to this type of so-called “lay-flat” financial management with stable and high returns?
Perhaps just a few years ago, the 10-year annualized growth rate of first-tier housing prices reached 10.75%, the 10-year annualized growth rate of Moutai was 30%, 7% of trust products were immediately redeemed, and even the interest rate on deposits with a maturity of more than 3 years could rise to more than 4%.
Real estate, core assets, trusts, etc. can be called the darlings of stable and high returns. When will it be the turn of U.S. bonds and insurance?
But in the past three years, the property market has been sluggish, the stock market has been turbulent, and trusts have exploded. In order to boost the economy, bond and deposit interest rates have also fallen significantly. Asset preservation has become the first choice for wealth management. If there can be stable growth, that would be great.
But, can financial management really be settled?
Not just a 5% risk-free return, but also an implied option to increase the bond price?
U.S. bond yields have risen sharply, which in other words means U.S. bond prices have fallen sharply.
This is mainly due to the fact that U.S. inflation has reached a 40-year high and the Federal Reserve has been raising interest rates. In the short term, the United States has accelerated its borrowing, as well as the selling of U.S. institutions and overseas central banks, which has also dragged down the price of U.S. bonds further, leading to a sharp increase in the yield to maturity.
Judging from the current trading of U.S. bonds, the average price of ultra-long-term varieties with remaining maturities of more than 25 years is around $63, which is an average decrease of about 30% from before the interest rate hike. Especially those bonds issued before this round of interest rate hikes with coupon rates of 2% and below have almost halved their trading prices.
This also means that the current allocation of U.S. debt. Not only does it lock in a 5% risk-free high return, but it also includes an option to buy the rising bond price.
In other words, if you hold it to maturity, you can get a rate of return of up to 5%. Once the Fed starts to cut interest rates, bond prices will rise, and selling after the price rises can earn a larger spread.
Assuming that U.S. benchmark interest rates return to pre-rate hike levels, bond prices may rise by more than 25%.
This kind of asset that can advance, attack, retreat and defend looks really good.
However, when looking at U.S. bonds from a "long-term" and "flat" perspective, on the one hand, the yield to maturity does not represent the coupon rate, and on the other hand, the risk-free interest rate does not mean that there is really no risk.
Can financial management really be "flat"?
First of all, the so-called 5% yield to maturity does not mean that you can get 5% interest every year. How much interest you can earn depends on the coupon rate of the bond purchased.
Looking at long-term U.S. bonds with remaining maturities of more than 25 years, coupon levels range from 1.25% to 4.12%.
A coupon of 1.25% means that each bond with a face value of US$100 pays annual interest of US$1.25, and a coupon of 4.13% means that each bond with a face value of US$100 pays annual interest of US$4.13.
Bonds with low coupons were issued before the Federal Reserve raised interest rates. Due to the low annual interest payments, the discount to the bond's trading price is also very large, basically around 50% off. The discount income from buying at a discount will not be realized until the principal is repaid upon maturity in 30 years.
Most of the bonds with high coupons are newly issued bonds, with high annual interest payments and small bond price discounts, with trading prices around US$80. As a result, the overall yield to maturity of long-term bonds is at the 5% level.
For example, based on the transaction price in the picture above, if you buy a US$1 million U.S. bond with a current yield to maturity of 5%, the annual interest rate you get is not US$50,000. If you buy a bond with a coupon rate of 4.12%, the annual interest will be approximately US$47,300. However, if you buy a Treasury bond with a coupon rate of only 1.25%, the annual interest received will be US$20,000 less, only US$27,700.
Therefore, the annual interest will eventually be lower than the 5% yield to maturity level. The lower the coupon rate, the less interest you will receive.
Secondly, the risk-free interest rate does not mean that there is really no risk.
For domestic residents allocating U.S. dollar assets, the first risk is exchange risk.
Exchange rates and interest rates are strongly correlated. Theoretically, if U.S. bond prices fall and interest rates rise, global funds will flow into the United States and the dollar will appreciate. vice versa.
Judging from the current economic growth rate and interest rate levels, the United States is at a high level, while the country is at a low level. It is equivalent to the USD/CNY being at a relatively high level.
Therefore, once the relative shape of the economy changes or the Fed's interest rate cut expectations start, U.S. debt begins to rise and interest rates fall, then the U.S. dollar will most likely enter a depreciation trend.
The depreciation of the U.S. dollar will offset the gains from U.S. dollar assets. Similarly, if it returns to the position at the beginning of the interest rate hike, there is 17% downside space for the U.S. dollar against the yuan.
This will pose a certain risk whether you want to obtain interest income from U.S. debt or the spread income from rising U.S. debt prices. Based on the calculation of $45,000 per year in the post, if the U.S. dollar appreciates to RMB 6, the monthly interest will be approximately RMB 5,000 less.
The second is liquidity risk. Over a period of up to 30 years, if there is a sudden need for large amounts of funds and U.S. bonds need to be sold in the market, and at this time, the Federal Reserve interest rate or expectations are maintained at a higher level, then you may face the risk of huge losses of principal.
Don’t forget that this is how Silicon Valley Bank collapsed with huge losses.
Just like the current yield to maturity has risen to 5%, compared with the yield to maturity of 4.5% a month ago, the bond price has fallen by 9.4%. In other words, the principal has been lost by US$94,000 before the interest is received.
The U.S. economy is currently strong, and there is still great uncertainty about whether interest rates will be raised in the future. It’s hard to say whether the price of U.S. debt will end. JPMorgan Chase CEO Jamie Dimon even said that the world may not be ready for the worst-case scenario of the Federal Reserve's benchmark interest rate hitting 7% and stagflation.
Of course, if you can hold it until maturity or wait until the period of low interest rates to sell, you will not face such a situation. Otherwise, if you need to exit U.S. debt assets during a period of high interest rates, you will face the risk of losses.
Another important thing is the risk of devaluation of purchasing power caused by inflation. Why are U.S. bond yields high? Because inflation in the United States is high, core inflation remains at 4%.
Even if you invest in U.S. bonds and use the interest received for domestic consumption, you will still face domestic inflation risks. From a long-term perspective, my country's economic growth rate and price rise levels are higher than those of developed countries in Europe and the United States.
Inflation risk measured from my country's GDP deflator shows that domestic real purchasing power has declined by 51.2% in the past two decades (because domestic inflation does not take into account asset prices such as housing prices, the decline in real purchasing power is relatively larger). In comparison, the United States fell by 38.5%. Therefore, for fixed income interest, the domestic depreciation rate may be higher than that in the United States.
Of course, the future domestic inflation and interest rate levels may be lower than those in the previous 20 years, and the actual decline in purchasing power may be relatively slow. However, as long as the inflation is normal, the interest on fixed-income assets will still be eroded by inflation, and the purchasing power will decline year by year.
There are no flat assets, only suitable assets
Therefore, even long-term stable high-yield assets in name are often matched with liquidity and high inflation risks.
In this regard, this is true whether it is 5% U.S. debt or 3.5% incremental life insurance.
Of course, the current yield to maturity of more than 5% on long-term U.S. bonds is indeed very good, but it is not unique.
Comparing long-term yield levels, the average annual rate of return of U.S. stocks over the past 30 years has reached 8%-10%, far exceeding that of U.S. bonds. Current U.S. Treasury Department data also shows that overseas private investors’ net purchases of U.S. stocks exceed their net purchases of long-term bonds. In other words, overseas investors’ preference for U.S. stocks is higher than that of bonds.
Comparing short-term high yields, the yields to maturity of 6-month, 1-year and 2-year U.S. bonds have reached 5.56%, 5.44% and 5.14% respectively, and the liquidity and reflation risks of holding to maturity are lower.
Therefore, whether it is equity assets or fixed-income assets, there are corresponding risks. If equity assets correspond to the risk of price rise and fall, then fixed-income assets correspond to the risk of liquidity inflation.
If you have idle foreign currency assets, it would be good to make certain fixed-income allocations to long-term U.S. bonds. However, using assets such as long-term U.S. bonds as core asset allocation may only be suitable for a small number of people who are averse to asset price fluctuations, have no sudden liquidity needs, firmly believe that the next 30 years will be an era of low inflation, and do not reinvest regular withdrawals.
Otherwise, who doesn’t want real stable and high returns?
Looking back at the past, how many people hesitated to get out of the car in the face of stable high-yield assets? Looking to the future, what can become a new stable high-yield asset? Is it U.S. debt? No one knows.
Therefore, when it comes to financial management, you can never settle down once and for all. You can only keep looking for assets that suit you.