Few investors are paying attention to US Treasury bonds, but I believe this is a missed opportunity. After all, you can currently earn a yield of over 5% per year in US dollars with short-term US Treasury STRIPS bonds. These are US Treasury bonds that pay zero interest, so why do they yield over 5%? And to begin with, what exactly is a STRIPS bond?
▼ There are US Treasury bonds that pay zero interest
US Treasury bonds are among the most trusted assets in the global financial market. Central banks and pension funds around the world hold massive amounts of them, and US Treasuries are also where capital flees when markets become turbulent. Among these US Treasury bonds, there are issues that pay no interest at all.
These are called “STRIPS bonds.”
Even bank deposits pay a pittance in interest, but for these STRIPS bonds, it is absolutely zero. There is not a single cent of interest (coupon). However, on online brokerage sites and the like, the reference yield for these bonds is sometimes listed at 5.08% per year (before tax). For example, there are products like the following available recently.
US Treasury USD-denominated STRIPS bond 2028/04/30
Reference yield (before tax, annual rate): 5.08%
Remaining maturity: approx. 1 year and 7 months
This is an issue that matures on April 30, 2028. The remaining period is only about 1 year and 7 months. These bonds can be purchased in units of $100. $100 is equivalent to a little over 15,800 Japanese yen. This is not a product that requires millions of yen to get started.
If the interest rate is zero, why does the yield exceed 5%? The key to solving this mystery lies in the price of the bond.
This issue is sold at around $92.55 against a face value of $100. On the maturity date, $100 is returned. Even without interest, the difference between the purchase price and the amount returned becomes your profit.
In Japan, there is a strong impression that US Treasury bonds are something bought by wealthy individuals. The number of individual investors who buy foreign bonds at securities companies is far smaller than those who buy stocks or investment trusts. This is even more true for STRIPS bonds that pay no interest.
Even so, why do US Treasury bonds with no interest exist?
▼ Bonds where principal and interest are separated
The name STRIPS is an acronym for “Separate Trading of Registered Interest and Principal of Securities.” In Japanese, this translates to a mechanism for trading the interest and principal of securities separately.
The English word “strip” also means to peel off, which overlaps with the meaning of a bond from which the interest has been stripped.
A standard US Treasury bond pays interest every six months and returns the principal at maturity. For example, a 10-year coupon bond combines 20 interest payments and one principal repayment into a single bond. STRIPS breaks this down into separate pieces.
The 20 interest payments each become independent bonds, and the principal also becomes a single bond. Each of these decomposed pieces is a bond that pays out money only once at maturity, which is called a zero-coupon bond.
Zero-coupon bonds are sold at a price lower than their face value instead of paying interest along the way. The further away the maturity, the cheaper the price, and the closer it is, the closer it gets to the face value.
For the issue maturing on April 30, 2028, the difference from the face value is $7.45, and the ratio to the purchase price is approximately 8.0%. This 8.0% is the interest for 1 year and 7 months, which translates to 5.08% when converted to an annual rate. If you buy this bond with 1 million dollars worth of yen, it will become approximately 1.08 million dollars before tax at maturity (assuming no exchange rate fluctuations).
All profits are received in a lump sum at the time of maturity.
Normally, with long-term government bonds, you can sell them when their price rises due to a drop in long-term interest rates to make a profit on the difference, but since STRIPS bonds have a short remaining maturity, you can likely just leave them until they mature.
In that case, after 1 year and 7 months, your investment capital will return with near 100% certainty, and it will also bring along an annual interest rate of 5.08%. If you had invested 1 million yen, it would become 1.08 million yen after 1 year and 7 months. It is annoying that taxes are taken from the interest portion, though…
▼ The strengths of short-term STRIPS bonds
The greatest strength of short-term STRIPS bonds is that the amount received at maturity is determined at the time of purchase. With stocks and investment trusts, no one knows what they will be worth in one or two years. Over a period of 1 to 2 years, there is a possibility that they could be below the purchase price.
As long as the US government does not stop payments, this bond will “definitely” return $100 per unit on April 30, 2028. Even if the price fluctuates in the meantime, the maturity amount will not change if you hold it without selling.
The level of yield is also high from a Japanese perspective. For example, the initial applicable interest rate for the October 2026 offering of individual government bonds (Floating 10-year, 199th issue) is 2.05% per annum (before tax). While it is true there is no exchange rate risk, it is not an interest rate level that makes one’s heart race.
In contrast, US STRIPS bonds with a remaining maturity of 1 year and 7 months are currently easily exceeding 5% per annum.
Unlike corporate bonds, government bonds do not carry the risk of the issuer going bankrupt and becoming worthless. After all, the issuer is the United States, for better or worse.
Of course, the US has a strange and dangerous president, its debt has ballooned to the limit, and it lost its top-tier credit rating a long time ago. That may be a risk. Congressional conflicts over the US government’s debt ceiling have also been repeated many times over the last decade or so. The US is not rock-solid.
However, the US is still the headquarters of modern capitalism. It is strange to worry that the US will collapse. It is even more absurd to think that it might collapse in 1 year and 7 months.
US Treasury bonds are the most traded bonds in the world. If you are suspicious of US Treasury bonds, you would not be able to do any other type of investment.
Long-term STRIPS bonds tend to be products that bet on the direction of interest rates, but short-term ones are rather products for deciding how much money you want to have by when. There are not many foreign currency-denominated assets where you can forecast profits this accurately in dollar terms.
▼ It would be a waste to overlook this
However, everything discussed so far is in “dollar terms.”
When a Japanese individual buys in yen and receives in yen, a major risk becomes the direction of the “exchange rate.” If the yen strengthens significantly against the dollar by the maturity date compared to now, there is a possibility that the profit in yen could be almost zero before taxes in some cases.
In the current environment, a yen appreciation of 10 yen or more within 1 year and 7 months is a possible movement.
To avoid such problems, you must set it up so that you receive the redemption profit in dollars, not yen. If you do that, you will be able to decide for yourself when to convert those dollars into yen, or whether to continue managing them in dollars.
However, taxes are an unavoidable problem, so this cannot be avoided. Regarding this, it is the same for both stock capital gains and dividend income, so it is not something that needs to be stated again, but caution is necessary.
If you can hold government bonds until maturity, unlike stocks, you do not need to take on downside risk. There is also no need to worry about dividend cuts.
Since the current US interest rate level is high, there is an interesting method for those who have surplus assets and want to steadily obtain 5%. For example, while interest rates are over 5%, you can continue to buy short-term STRIPS bonds with a yield of over 5% every month.
For example, you decide to buy 1 million yen worth every month if the interest rate is over 5%. Then, if the interest rate is over 5% for 6 months, the principal and interest will return one after another at maturity with this high interest rate. If the interest rate of over 5% continues for a year, you will end up investing 12 million yen.
If you manage to adjust the remaining maturity month by month, you will receive 1 million yen at maturity each month along with an annual interest rate of over 5%.
The United States once experienced an era of high interest rates from the 1970s to 1981, recording an all-time high of 15.8% in September 1981. If such an era were to return, I would sell all my stocks and turn into a bond investor, fully investing exclusively in bonds.
Once bonds reach a high interest rate of over 5%, they become interesting as an investment target. It would be a waste to overlook this.
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