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Bonds and interest rates in the USA

For a European private investor, investing in US fixed-income securities can make perfect sense. This way, you benefit from several advantages: First of all, you can spread your investments more widely and thus diversify the risks more effectively. In addition, the US economy and the European economy are often in different cycles, so investing in US stocks may help cushion an economic downturn in Europe.

Are US bonds worth a closer look? Answer: Yes!

The US bond market is the largest in the world. Therefore, it offers more choices than the European market and is also more liquid, which increases the tradability of US bonds. And the crucial reason in favour of US bonds is that the interest rate level in the US is higher than in Europe.
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An experienced asset manager can provide much helpful advice in this respect.

The turnaround in the US interest rate cycle is within reach!

What measures is the ECB taking? Due to higher inflation (in January 2022, the inflation rate in the US had risen to 7 %), US interest rates are around 2 % higher than in Europe. The most important indicator of interest rates on the US capital market is the yield on the 10-year US government bond.
  • Since its low of 0.5 % in July 2020, this has risen continuously and is now just under 2 %.
By way of comparison:
  • The 10-year federal bond has only just rebounded to above zero.
Moreover, the Federal Reserve is expected to start raising interest rates in March 2022. The majority of market observers expect that there could be four to five interest rate steps in the USA in 2022. The key interest rate would thus be able to rise from the current 0.00–0.25 % to perhaps 2.00 %. And this is precisely what the long-term US bond market has already priced in over the past few weeks. The ECB seems still far away from such a measure. So, the interest rate gap between European bonds and their US counterparts is likely to widen, which argues in favour of investing in US bonds.

But be careful: Always keep an eye on the exchange rate!

Since US interest-bearing securities are quoted in US dollars, it is important to pay attention to the exchange rate development of the EUR/USD currency pair. Currently (2022/02/25), the exchange rate is 1.12. In May 2021, the euro was still at 1.22, but it has lost a lot of value against the dollar in recent months. With the interest rate turnaround in the USA starting in March 2022, the US dollar should continue to have upward potential against the euro due to the even greater interest-rate advantage. This prospect makes US bonds additionally attractive.
The difference is even more evident in the segment of US corporate bonds. While the bonds of large European companies yield just 2 %, large US companies such as Xerox, Chemours, YUM! Brands or Altria offer yields of 5 % and even a little over 6 %.
The sample portfolio shows attractive investment opportunities on Corporate Bonds. Both in EUR and USD can be found in this segment. A real sample portfolio (with a list of bond issuers) can be sent at any time upon request.

Conclusion: strategic diversification into US bonds is definitely recommended!

For these reasons mentioned above, it is strongly recommended to diversify into US bonds as well, thus reducing the risk in a portfolio and compensating for the exchange rate risk with higher yields of US bonds. In addition, due to the size of the US bond market, US bonds are more liquid than European bonds. This has a positive effect if you not only focus on the big players in US corporate bonds but also consider smaller US companies or get involved in niche issues in the US. This is why almost all portfolios managed at Genève Invest have an admixture of around 30–40 % in US titles. And this strategy has clearly proven its worth so far.

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