Last Friday, the United States released its non-farm payroll data, showcasing a remarkable addition of 256,000 jobs, which significantly surpassed the market expectation of just 160,000. This surprising job growth has led to a further diminishing expectation for an interest rate cut by the Federal Reserve, causing the yield on the 10-year Treasury bond to rise, reaching 4.79%. In contrast, the yields on Chinese government bonds, despite a recent rebound, remain below 1.7%, thereby widening the interest rate differential between the United States and China.

Given this high yield on U.S. Treasury bonds, many are pondering whether now might be a good time to invest in these securities. The allure of a yield close to 5% is indeed tempting for both seasoned investors and novices alike. However, investing in bonds goes beyond simply tracking interest rates; it's crucial to understand the two types of income they can generate: coupon income and capital gains.

When purchasing bonds, it's straightforward to appreciate the coupon, which represents a steady stream of income. For example, a Treasury bond that yields 4.79% provides a reliable return on investment. But a more significant portion of the potential profits often comes from capital gains—essentially, profits made when the bond's price increases due to falling interest rates.

To illustrate, if interest rates in the U.S. decline, pre-existing bonds with higher yields become more attractive, allowing investors to sell them at a premium, realizing a capital gain. Conversely, if rates rise, it leads to a deterioration in bond prices, resulting in capital losses. Predictions at the end of last year suggested that the Federal Reserve might cut interest rates twice in 2025. However, current conditions indicate that such optimistic forecasts may be overly hopeful.

According to projections by the CME, there’s a staggering 93.1% chance that the Federal Reserve will maintain interest rates during its January meeting, with the first anticipated cut possibly occurring around June— and even that may be the only cut for the entire year. Hence, it appears unlikely that there will be any substantial capital gains in the first half of the year; at best, investors may aim to avoid capital losses.

Another nuanced aspect of investing in U.S. Treasury bonds is the exchange rate, particularly for Chinese investors who typically need to convert their yuan to dollars to make such investments. The fluctuating exchange rate can significantly impact overall returns when redeeming these bonds. For instance, if the yuan depreciates against the dollar, investors can profit in a favorable exchange back to yuan; conversely, if the yuan appreciates, it could erode returns.

Let's consider a tangible example. The Wells Fargo Global Bond fund offers both yuan-denominated (100050) and dollar-denominated (007140) shares. Investments made in yuan necessitate currency conversion into dollars before being switched back to yuan when redeeming, thus exposing them to exchange rate fluctuations. On the other hand, dollar-denominated shares invest directly in dollars, thereby minimizing exposure to the yuan-dollar exchange rate.

Over different years, performance variations between these two share classes strikingly highlight the impact of currency rates, particularly in the context of a robust U.S. dollar index and persistent depreciation pressures on the yuan. The People’s Bank of China has made it clear that it intends to maintain currency stability, actively taking measures to support the yuan's value, as seen with the recent adjustment to the macro-prudential parameters concerning cross-border financing.

To encapsulate, when contemplating an investment in U.S. Treasury bonds, it’s essential to assess three main elements: coupon income, capital gains potential, and exchange rate influences. Given our earlier discussions, while coupon yields appear favorable, prospects for capital gains seem slim and will depend significantly on currency movements.

Should you evaluate all three factors and still consider U.S. Treasury bonds a worthwhile investment, it is prudent to delve deeper into specifics.

02

So, where can one purchase U.S. Treasury bonds?

In China, there are several popular avenues to invest in products related to U.S. Treasury bonds. Among them, mutual funds recognized in Hong Kong and Qualified Domestic Institutional Investor (QDII) funds stand out, along with bank offerings for dollar-denominated wealth management products. Let’s delve into the first two options.

At the start of the year, mutual funds were granted a more substantial investment quota by relaxing sales ratios in offshore markets. However, this newly released quota was quickly snapped up by eager investors.

Among the key mutual funds focused primarily on U.S. Treasury securities, such as the E Fund (Hong Kong) Select Bond Fund, Southern Eastern District Select Dollar Bond Fund, and the Morgan International Bond Fund, many currently have closed their doors to new investments.

Limited availability also characterizes QDII bond funds; you may find few options still open for investment. I’ve sifted through the offerings and pinpointed a few accessible ones for your consideration.

When purchasing these U.S. Treasury funds, it’s vital to check the underlying investments. The options I've filtered are mainly focused on American-based securities, aligning well with the intent to invest in U.S. Treasury bonds.

Taking the Wells Fargo Global Bond Fund as an illustrative case, it predominantly holds U.S. Treasury bills, government bonds, and inflation-protected securities.

On the contrary, certain QDII dollar bond funds might prioritize Chinese dollar-denominated bonds. These securities are issued by domestic firms but denominated in U.S. dollars. For example, the Huaxia Yield Bond Fund (QDII) features investments where five out of six major bonds are such dollar-denominated instruments, including a top-holding bond from Bright Galaxy International Ltd., issued by a domestic company with a 3.5% coupon rate.

Therefore, these domestic dollar bonds are influenced not only by U.S. interest rates and the exchange rate with the dollar but also by the issuer's creditworthiness and the industry landscape—adding layers of complexity compared to traditional U.S. bonds. Thus, for those strictly interested in U.S. Treasury securities, it's crucial to conduct thorough due diligence.