How to invest in government bonds if Washington is buying Treasury bonds

Last week, the US Treasury announced that it would double its purchases of US government bonds, known as Treasuries. Specifically, the buyback – that is, the repurchase of its own securities – will focus on long-term issues, ranging from ten to thirty years. The operation will be worth between 38 and 58 billion dollars and comes after a fairly long period of Treasury sales on the market.

In theory, this move is positive for holders of US government bonds, as such substantial purchases would drive up prices. In fact, there has been a rise in Treasury prices and, consequently, given that coupon rates remain unchanged, a fall in final yields for those who hold the bonds until maturity. However, investors’ enthusiasm was short-lived and prices have resumed their downward trend following fresh selling.

The US Treasury’s move has, in fact, been interpreted as a warning sign regarding US debt, which in recent days has exceeded 40,000 billion dollars and which, due to rising yields, is becoming increasingly costly for the US government. Given the recent acceleration in bond issuance, the statutory debt ceiling is approaching (at $41,000 billion) and, to prevent government operations from grinding to a halt due to a lack of funding – as has happened on several occasions – it may need to be raised through a bipartisan and complex agreement in Congress. The Treasury’s buybacks were triggered following a period of selling of long-term government bonds: yields on 10-year bonds rose above 4.7 per cent and those on 30-year bonds above 5.3 per cent.

For some time now, partly due to fears of inflation driving up yields (and pushing down bond prices), experts have been advising against excessive exposure to long-term maturities, particularly those of US bonds. “Although the buy-back programme may trigger a short-lived rally with moderate effects,” says Tobias Engl, portfolio manager and fixed-income specialist at Acatis Investment, “we remain cautious towards US Treasuries across the entire yield curve. Looking back over the last twenty years, the best risk-adjusted returns on government bonds in hard currencies have been achieved in the middle of the curve, around the four- to five-year mark. We believe this still holds true today.”

Conversely, Engl believes that Eurozone bonds are more attractive, as they are trading at excessively high yields given that the European economy is less overheated, and that from 2027 onwards, monetary policy could become a favourable tailwind rather than a headwind. “In summary,” concludes Engl, “it is better to maintain a cautious approach to US duration and increase that in euros, bearing in mind that, in periods of economic strain, high-quality bonds play an important role in a well-diversified portfolio.”