Money and Me: Treasuries at 5%: Time to Lock In? Plus Gold, AI Risk and the Yen Carry Trade

SPEAKER_1 (0:01)

Best of Live Well with Michelle.

It's not just about money, it's about you. Money and me, where wealth meets self-awareness. Only on Money FM, 89.3.

Michelle Martin (0:18)

There is a lot for investors to make sense of right now. Bond deals are back at levels we haven't seen in years.

Gold and the US dollar seem to be moving together, rising. Central banks around the world facing very different problems. And then there is AI, where even some of the people building the technology are telling us to proceed with caution. So where are the opportunities and where are the risks? And how can investors move and protect money as rates rise? Swapnil Mishra is author of a fantastic book. He is also a lecturer and he's speaking with us live. His book is Investing for the Clueless, Reckless and Overly Cautious. Good morning, Swapnil.

Swapnil Mishra (0:58)

Good morning.

Michelle Martin (0:59)

Good of you to join us. Swapnil, help us understand the anxiety in the bond market. Bond yields, though, at multi-year highs. People are wondering, how can we not lock in 5%?

So could investors who jump in now still be too early?

Swapnil Mishra (1:13)

I mean, the income level as a number, it is really attractive. I completely agree to see those 5% numbers. It is attractive, but I like the income, but I don't like the duration. So I would still not jump into long-duration 10-year, 20-year bonds, because I think that the multitude of factors that are affecting the, or rather contributing to the rise in yields, I think they're not done with them yet. And so it still remains vulnerable. So I would lock in only shorter-dated papers, but not long-term.

Michelle Martin (1:46)

And by shorter-dated, you mean?

Swapnil Mishra (1:50)

Less than three years. So one to three years is still attractive enough.

You're staying on the lower end of the yield curve and not going at the longer end, because that is at risk of yields going even higher, as the term premium investors demand.

Michelle Martin (2:05)

So you're saying 5% may not be the peak?

Swapnil Mishra (2:07)

No, I think it can go higher, because all the factors that are affecting it are still in play.

SPEAKER_1 (2:12)

Inflation, oil is expensive.

Michelle Martin (2:14)

Go ahead, yeah.

Swapnil Mishra (2:15)

Absolutely. So they are still around, these factors.

Michelle Martin (2:20)

Do you think 5% risk-free rate is going to force investors to rethink what they're willing to pay for equities?

Swapnil Mishra (2:28)

So I think risk-free rate, one is, if you look at it from a real yield point of view, I agree that the 5% is quite attractive, especially for institutional investors. I do feel that investors who are like, let's say, a pension fund or, you know, people have to lock in institutional investors who have to lock in for the next 10 years, it's a good opportunity to lock in, even if you use one of these Treasury inflation protection instruments, you are able to lock in to real yields of more than 2.5%, which is very high, you know, if you contrast it to the last 10, 15 years. So yes, it is good. But in the shorter term, from a tactical point of view, I think the one to three year is more attractive because it has benefited in terms of giving higher absolute yield and is less vulnerable to any kind of impact on the longer end of the yield curve.

Michelle Martin (3:19)

So you are basically saying stay short and enjoy the yield.

Swapnil Mishra (3:23)

Yeah. If you are an even more adventurous investor, you will do steepeners. So you will actually short the long end and go along the shorter end.

Michelle Martin (3:32)

Haha, that's poetry this morning.

Swapnil Mishra (3:39)

Yeah, so that's a steepener. You are taking a view that yields will rise even more than 5% on the long end and on the shorter end, it will actually start coming down as some, at least some energy-related factors start coming under control, especially the whole conflict. You know, I have to ask, the big drivers.

Michelle Martin (3:57)

The big drivers is energy costs. At what yield does the market effectively put a floor under itself? When does 5% become so attractive that, I guess, big institutional buyers just have to step in?

Swapnil Mishra (4:10)

I think that at these levels, they will start stepping in, especially the ones who are default long US dollar and they need to park somewhere. So for them, it makes complete sense. They are not doing it as a trade. They are doing it because they have the assets and they need to park it and they have liabilities which are not now but 10 years down the road or 15 years down the road. So for them, putting it in treasury is necessary and they will continue to do it. Now, people who are not buying treasuries because they are changing or they are making changes to their reserve currency status, for them, this becomes a slightly more, it's more nuanced because on one hand, they want to move away from US dollar as a reserve currency, US Treasury as a reserve, but on the other hand, the percentage number is quite attractive. So for them, it poses a real dilemma and you're right, it may attract a few of these kind of reallocations who were originally thinking of going away from US Treasury, but may want to come back and reconsider that.