Why investing in US bonds may not be a good idea

livemint.com:

‘Know how to diversify your portfolio with US bonds’. My point of view is different, which is why I felt the need to write this edition of Contramoney on the subject. My goal is to lay out the facts as I understand them to be, and then leave it to you, dear reader, to decide what you want to do with your money.

Let’s start with what I don’t agree with in the piece I refer to. First, the piece makes an interesting assumption – that US interest rates are expected to keep rising for some more time. This statement makes it seem that higher interest rates are a given, but the fact is that no one knows for sure.

In fact the view on US interest rates, both at the short end and the long end, is divided today, with many stalwarts taking opposing views. Many a fortune has been destroyed just in the past couple of years as people bet incorrectly on the direction of interest rates. Having said that, even if we assume that higher interest rates are coming, that will likely be bad for treasury bonds (longer duration), and that doesn’t seem to have been factored into this idea of global diversification into US treasuries.

Second, to make a case for US bonds, the earnings yield (nothing but the inverse of the P/E) is compared with the US bond yield. The article cites the Nifty yield at 4.5%, while the one-year US treasury yield is at 5.43%. To be fair, comparing the earnings yield to bond yields make sense, as people may do a risk-return trade-off in their heads (or spreadsheets) when investing.

But how and what you compare is equally important. Here are a few points to ponder: Third, the Mint article assumes that over time the Indian rupee will depreciate. However, the point is stretched to the implication of a 4% to 5% depreciation