Know how to diversify your portfolio with US bonds

Bonds now provide a substantial challenge to stocks as an investment choice, help cut risks

- Akshat Rohatgi

Geopolitical disturbances, G such as the recent Israel-Gaza conflict or the Russian-Ukraine war, have put the spotlight on asset diversification that helps manage risks to investment portfolios. Historically, Indian investors have often restricted their portfolios to domestic assets, limiting diversification opportunities. Embracing global markets can offer a powerful avenue for enhanced diversification. Investing in global assets, especially global fixed income securities, has become important. This expanded approach provides Indian investors with the potential for broader diversification and reduced risk in their portfolios.

US treasuries are an increasingly compelling alternative to risk assets given that interest rates are expected to keep rising for some more time. The S&P 500 earnings yield, essentially the inverse of the price-to-earnings ratio (P/E), serves as a valuable metric for investors. It offers insight into the return on investment in terms of company earnings for every dollar invested in the market. Currently, the two yields are converging at approximately 5%, marking the narrowest gap seen since at least 2005.

Nifty's earnings yield stands at 4.5%, whereas a 1-year US treasury note offers 5.43%, as of 9 October. This convergence signifies an intriguing development where bonds are now providing a substantial challenge to stocks as an investment choice. Investors are confronted with a new reality: the presence of numerous alternatives.

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