With US 10-year Treasury yields near 5.3%, some investors expect 8% returns by adding historical rupee depreciation. However, this is not a guaranteed outcome, as currency fluctuations are unpredictable and rising interest rates can lower bond prices.
With US 10-year Treasury yields currently trading in the 5.3% range, levels not seen since 2002, many Indian investors are looking at US government bonds as a potential investment. A common argument suggests that if the base yield of approximately 5.3% is combined with the historical annual depreciation of the Indian Rupee (INR) against the US Dollar (USD)—often estimated at 3%—investors could mathematically target an 8% return. However, viewing this as a fixed or reliable income strategy ignores several market realities that every investor should consider.
The Math Behind the Potential Returns
The idea of earning 8% relies on two separate components. First, there is the base interest paid by the US government, which is currently around 5.3%. Second, there is the gain from the currency. If the rupee loses value against the dollar, the investment becomes more valuable when converted back into rupees.
However, this currency gain is not a contractual guarantee. While history shows that the rupee has generally depreciated against the dollar over the long term, this does not happen in a straight line every year. If the rupee stabilizes or strengthens against the dollar during the holding period, the total return for an Indian investor would fall below the base yield. Relying on currency movement to boost returns turns a fixed-income investment into a speculative bet on foreign exchange rates.
Why Bond Prices Pose a Risk
Investors often forget that bond yields and bond prices have an inverse relationship. When US interest rates remain high or are expected to rise further, the market price of existing bonds often drops. If an investor decides to sell their bond holdings before the maturity date, they could face a capital loss that wipes out the interest earned. This price risk is particularly important for those who choose longer-duration bonds. In an environment where the US Federal Reserve maintains uncertain interest rate policies, the risk of capital erosion is a real factor that can turn a positive yield into a negative total return.
Access, Taxes, and Practical Barriers
Indian residents typically access US Treasury exposure through the Liberalised Remittance Scheme (LRS), international brokers, GIFT City platforms, or specific mutual fund 'fund-of-funds' that invest in US Treasury ETFs. Each route comes with its own set of friction. Remitting funds under the LRS involves administrative processes and, in some cases, a Tax Collected at Source (TCS).
Furthermore, the tax treatment is a crucial consideration. Interest income earned from US bonds is generally taxed at the investor's applicable income tax slab in India. Additionally, any gains from the currency conversion are also taxable. When these tax costs and remittance fees are deducted, the net return effectively shrinks, making it difficult to achieve the headline 8% figure.
Most financial planners suggest that US Treasuries are better suited as a strategic tool for currency diversification or for funding future dollar-denominated expenses—such as children's international education—rather than as a primary vehicle for chasing yield. The next important step for any investor interested in this space is to monitor Federal Reserve interest rate commentary and track the INR/USD exchange rate trend, as both will be the primary drivers of future returns.