Could You Double Your Money With The World’s Safest Asset?

Could You Double Your Money With The World’s Safest Asset?
Russell Burns

about 1 month ago5 mins

  • Higher yields on US Treasury bonds mean you can double your investment return in 14.5 years, thanks to the rule of 72.

  • In recent weeks, investing icons Bill Ackman (Pershing Square Capital Management founder and CEO) and Bill Gross (the PIMCO founder long known as “the bond king”) have both reversed their bearish views on bonds.

  • With yields at roughly 5%, US Treasuries look attractive enough for buyers to step in and offset supply worries. But if you want to be one of them, be aware that long-dated Treasury bond ETFs carry added risks that don’t exist for individual bonds.

Higher yields on US Treasury bonds mean you can double your investment return in 14.5 years, thanks to the rule of 72.

In recent weeks, investing icons Bill Ackman (Pershing Square Capital Management founder and CEO) and Bill Gross (the PIMCO founder long known as “the bond king”) have both reversed their bearish views on bonds.

With yields at roughly 5%, US Treasuries look attractive enough for buyers to step in and offset supply worries. But if you want to be one of them, be aware that long-dated Treasury bond ETFs carry added risks that don’t exist for individual bonds.

Life in Bondland hasn’t been this exciting in years. Longer-dated US Treasuries have seen their prices crushed, with some falling 50% as higher inflation and higher interest rates take a heavy toll. That kind of market selloff tends to signal one thing: opportunity. But before you go buying up any ole government note, let’s take a look at the US bonds that could double your money, how much time they'd take to do it, and the hidden danger in bond ETFs.

So what’s different about bonds now?

Interest rates are at highs not seen since 2007, putting the yield on the 10-year Treasury up around 5%, more than double where it was just 18 months ago. And when yields rise, bond prices fall, and that’s especially true of longer-dated bonds, because when you discount all of a bond’s coupons by those higher interest rates, you get a lower value today. As a result, bond prices are low enough now that they’re starting to attract new buyers – including some of the market’s biggest bond bears. Over the past week or two, Bill Ackman (Pershing Square Capital Management founder and CEO) said that he covered his bond short bets, and Bill Gross (the PIMCO founder long known as “the bond king”) said he’d started buying short-dated interest rate futures in anticipation of a recession this year.

And they’re not alone. In the past few weeks, the iShares 20+Treasury Bond ETF (ticker: TLT; expense ratio: 0.15%) hit a new nine-year low in price and then saw 87.7 million shares change hands, the highest volume in its 21-year history.

The iShares 20+Treasury Bond ETF price, at top, and volume, bottom, over five years. Source: Bloomberg.
The iShares 20+Treasury Bond ETF price, at top, and volume, bottom, over five years. Source: Bloomberg.

The appeal of a US Treasury bond is simple: it guarantees it’ll pay you the yield on the coupon twice a year for as long as you hold it, and it guarantees to pay you back the principal – the par value of $100 – once it matures. And because the lender is the US government, you can be confident you’ll get those payments.

When you buy a Treasury bond, your investment return is a combination of the coupon income and the capital gain (or loss) from the price change. If you buy a bond trading below par – that is, below $100 – then you can be assured that you’ll see a capital gain if you hold it until maturity.

So how do you double your money?

First, you’ll want to get to know the “rule of 72”. It’s a simple and dependable way to estimate the number of years it takes for an investment to double in value at a given annual rate of return. The calculation is as follows:

Number of years needed to double your money = 72 divided by the rate of interest or return.

With the yield, or rate of interest, on a 10-year US Treasury at 5%, the number of years needed to double your investment is about 14 years ( or 72/5 = 14.4).

The rule of 72. The number of years for your money to double is roughly 72 divided by the rate of interest or return. Source: Schroders.
The rule of 72. The number of years for your money to double is roughly 72 divided by the rate of interest or return. Source: Schroders.

So the number of years needed to double your return depends on different interest rates, or rates of return. And it’s worth noting that the number it spits out is before taxes and inflation.

Still, if you want to double your investment return, you could seek out a US Treasury bond that matures in 15 years and yields 5%. The US Treasury bond with a 4.5% coupon, maturing on May 15th, 2038 is trading at around $92.84 and would fit the bill. It yields 5.02%. And that return is achievable if you invest via a tax-advantaged account like a 401(k) or an IRA.

If your investments aren’t in a tax-efficient fund, two potential issues will undermine your targeted returns. First, there’s the tax that you’ll have to pay on the annual income received from the coupon payment, and second, you’ll have to be able to reinvest the income received at that 5% rate to actually double that initial investment in the targeted time frame. See the rule of 72 relies on compounded returns – and assumes that any income or dividends are reinvested back into the asset at the same rate.

To reduce these two issues, you could invest in a US government bond with a low coupon, so most of your investment return comes from capital gains. I managed to find two bonds that meet the brief.

US Treasuries highlighting coupons, maturity dates, prices, and yields to maturities. Source: Bloomberg.
US Treasuries highlighting coupons, maturity dates, prices, and yields to maturities. Source: Bloomberg.

One is the US Treasury with a 1.125% coupon that matures on August 15th, 2040. It currently trades at $54.30 and yields 5.24%. Sure, it will take 16 years to mature, but most of the investment return will come from capital gains, not interest income.

If you are willing to look at a bond with seven years to maturity, on the other hand, you could invest in the US Treasury note with a lower 0.875% coupon that matures on November 15th, 2030. It’s currently trading around $76.80 and yielding 4.8%. Most of the investment return will again come from price appreciation, not the coupon.

Can you do the same thing with bond ETFs?

I hear you: ETFs make this stuff pretty easy. And you could invest in a Treasury bond ETF, like the iShares 20+Treasury Bond ETF or the iShares 7-10 Year Treasury Bond ETF (IEF; 0.15%), as both have fallen sharply in price over the past few years. But the key risk with these ETFs is that they hold only long-dated bonds. So the 20+Year ETF will sell any bond after it moves below 20 years to maturity. They never hold a bond to its maturity.

That creates a potential issue. In 15 years, you might want to sell your investment, expecting to have doubled your money. But if the pros turn out to be wrong (again) – say, because unforeseen events lead to inflation running at 10% and interest rates running at 10% too – these ETFs will have fallen very sharply in price once again. See, the picking and choosing of individual securities is out of your hands when buying longer-dated ETFs. And there’s no guarantee that you’ll achieve that expected return. In some ways, bond ETFs could be better for trading than for long-term investing if you have a specified investment time horizon in mind.

You can buy individual US bonds through your brokerage account, or directly from the US Treasury.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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