Why I’m going to Buy U.S. Treasury Bonds

Investing in bonds may not seem as exciting as trading stocks or betting on high-growth startups. However, I’ve decided to purchase 20-year U.S. Treasury bonds because I believe they currently offer an excellent opportunity for short-term gains and protection in the event of a recession. Here, I’ll explain the reasons behind my decision and provide a brief overview of how bonds work.

What Are Bonds?

A bond is a debt instrument issued by governments, corporations, or other entities to raise capital. When you purchase a bond, you lend your money to the issuer, who agrees to pay regular interest (a coupon) and return the principal amount upon maturity.

Key features of a bond include:

• Face Value (Principal): The amount the investor receives at maturity.

• Coupon Rate: The fixed interest payment the investor receives periodically (e.g., annually).

• Maturity Date: The date when the issuer repays the principal.

Example:If you buy a bond with a face value of €1,000 and a 4% coupon rate, you will receive €40 in annual interest.

Why Do Bond Prices Fall When Interest Rates Rise?

There is an inverse relationship between interest rates and bond prices. When market interest rates rise, existing bonds with lower coupon rates become less attractive.

For instance, if you own a bond with a 4% coupon and a €1,000 face value, and market rates rise to 6%, new bonds would offer €60 in annual interest. Your bond, which pays only €40, becomes less appealing, and its price would drop to approximately €660 (as €40/€660 = 6%).

Conversely, if interest rates fall, the value of existing bonds rises. If new bonds offer just 2% interest (€20 annually), your bond with a €40 coupon becomes more valuable, raising its price to around €2,000 (€40/€2,000 = 2%).

Why Am I Buying 20-Year U.S. Treasury Bonds?

20-year U.S. Treasury bonds currently present an attractive opportunity for investors. Here’s why:

1. Current Market Conditions

• Long-term U.S. Treasury bond yields are around 4.5%, relatively high compared to past decades.

• Additionally, the TLT ETF (which tracks long-term U.S. Treasury bonds) is trading at a discounted price of $90.15, meaning these bonds are priced below their face value.

• According to the Polymarket platform, there is a 97% chance that the U.S. Federal Reserve (Fed) will soon cut interest rates by 0.25%. A rate cut would make existing bonds with higher coupons more attractive, driving up their prices.

  

  
  

2. Impact of Rate Cuts on Bond Prices

Lowering interest rates directly increases bond prices due to the inverse relationship mentioned earlier. This effect is particularly pronounced in long-term bonds, such as those in the TLT ETF, because of their high duration.

Duration measures how sensitive a bond’s price is to changes in interest rates. For funds like TLT, the duration is about 20. This means a 0.25% rate cut could increase bond prices by roughly 5%, taking TLT from $90.15 to approximately $95.

3. Bonds as Recession Protection

In addition to providing potential returns, bonds serve as an excellent hedge during economic downturns. Historically, long-term bonds have performed exceptionally well during recessions. Why? Central banks typically lower interest rates during recessions, boosting bond prices.

Historical Examples:

• 2008: During the financial crisis, the TLT ETF rose by 30% as stock markets plummeted.

  
  

  

  
  

• 2020: At the onset of the pandemic, stock markets dropped 25%, while TLT surged 20%.

  

  
  

These cases demonstrate that long-term bonds are a reliable safeguard during economic crises.

Are Bonds a Good Long-Term Investment?

While bonds are great for recession protection and short-term gains, they’re not the best choice for long-term growth.

Why?

• Historically, bond returns barely keep up with inflation. Since the gold standard was abandoned, most major currencies are no longer tied to tangible assets, reducing bonds' real value over time.

• Average annual bond returns typically lag behind stock market returns, making them less effective for long-term capital growth.

  

  
  

Conclusion: Why I’m Investing Now

U.S. long-term Treasury bonds are appealing for two key reasons:

1. Short-term profit potential:With the Fed likely to cut interest rates, bond prices are expected to rise.

2. Recession protection:If an economic downturn occurs, bond prices are likely to increase, helping offset potential stock portfolio losses.

   
   

Although bonds are not ideal for long-term capital growth, I see them as a strong tool for short-term gains and risk mitigation amid potential market volatility.

In my next article, I’ll delve into why I anticipate a consolidation in stock prices and how to prepare for a possible recession.

This article reflects my personal investment perspective and is not financial advice.