If you invest in the US markets, you would have heard about the 10-year treasury yield at some point. The treasury yield is nothing but the annual interest rate the US Government pays on its debt obligations (treasury bonds).
What are treasury bonds?
Governments, like companies, need to raise funds for different purposes; be it to pay off their debts or invest in infrastructure. One way for them to raise funds is to issue bonds that investors will purchase. Treasury bonds are bonds issued by the government. When you buy a treasury bond you are essentially loaning money to the government at a predetermined interest rate. In return, the government will pay you a fixed interest rate for a fixed duration. When the duration is over or when the bond matures, the principal is returned to you. US treasury bonds are issued by the US Federal Government. The maturity period of treasury bonds is typically between 10-30 years.
Since the they are issued by the US Federal Government, they are one of the safest instruments you can invest in. They are considered risk-free assets because there is no risk that the investor will lose their principal. Treasury bonds are AAA-rated securities and are safer than corporate bonds.
How to invest in US treasury bonds from India
Indian investors cannot invest directly in US treasury bonds. However, they may invest in US treasury bonds through publicly traded ETFs.
Treasury ETFs let investors gain passive exposure to US Government bonds. Treasury ETFs consist of a basket of treasury securities and may focus on a certain maturity or a range of maturities. These ETFs give you flexibility to trade them a stock exchange just like trading in stocks. Also, unlike treasury bonds, treasury ETFs do not expire. At a given point in time, a treasury ETF will have bonds that are at different stages of maturity. Treasury ETFs constantly rebalance their bond holdings by purchasing new bonds and they pay out interest in the form of a monthly dividend.
For example, the iShares 7-10 Years Treasury Bond ETF (IEF), seeks to track the investment results of an index composed of US treasury bonds with remaining maturities between seven and ten years. Similarly, the iShares 3-7 years Treasury Bond ETF (IEI) seeks to track the investment results of an index composed of US treasury bonds with remaining maturities between three to seven years. For the iShares 1-3 years treasury bond ETF (SHY), the corresponding period is between one and three years.
Things to keep in mind
While treasury ETFs come with certain advantages, there are a few things one needs to keep in mind. Since treasury ETFs do not mature, they do not offer similar protection for your investment amount as a treasury bond does. The underlying securities have no chance of defaulting, but investors are exposed to principal risk when investing in treasury ETFs.
However, treasury ETFs remain a good way for investors to build a diversified portfolio and hedge it against uncertain market conditions as it has a low correlation to equities.