Interesting Choices for a 10 year Debt Investment ~ US Treasury Notes or State Bank of India Fixed Deposit ?

Interesting Choices for a 10 year Investment ~ US Treasury Notes in US $ or State Bank of India Fixed Deposit in Indian Rupees ?

What would you choose ? 😕  ~ An Indian Resident is now allowed Overseas Investments up to US $ 200000 annually

US Treasury Note 10 Year Yield is currently 1.66%

 SBI 10 Year FD Yield is 14.35 %  (Interest Rate is 9 % compounded annually)

Let’s stick to the basics ~ whenever assessing Investments use the SLR Criteria ~ Safety,Liquidity and Returns

Safety ~ Both Investments are relatively Safe ~ SBI FD more so maybe ! 🙂

Liquidity ~ Both are fairly Liquid and can be liquidated before Maturity

Returns ~ Ah! herein lies the Million Dollar Question ! ~ The Treasury Note (see below) offered fixed 1.75% Interest pa,payable half yearly.The SBI FD offers 9% pa compounded annually

On the Face of it the Yield of the  SBI FD is Much Higher as there is a CAGR of Interest too ~ However we need to look beyond

A 10 Year US $ Treasury Note issued in May 2012 had the following attributes when auctioned

Security Type Issue
Rate %
Per $100
10-YEAR NOTE May 15,2012 May 15,2022 1.750 1.855 99.045657

For a 10 Year Treasury Note the Interest is paid every six months,so there is no CAGR of Interest as in the case of the SBI FD.This Interest is not subject to local and state income taxes but is subject to federal income taxes in USA.On Maturity Date the Face Value is paid ,that is US $ 100 ~ am not considering reinvestment of Interest received ~ if I do so the Returns on the Note from the Original Principal will be higher

Treasury Note Yields are not expected to rise significantly till 2014 atleast as USA attempts to revive it’s Economy through Quantitative Easing Measures and providing stimulus for more Investments and Production and Consumption without flaming Inflation and in an effort to tackle Unemployment that threatens to break 10% all the time

What we need to understand is the Exchange Risk ~ as one Investment is in US $ and the Other is in Indian Rupees ~ The Returns have to adjusted for the exchange movements from the date of Investment to the date of Maturity

The Rupee has seen a declining trend for decades.However In the 21st century from 2001 to date June 9,2012,nearly 11 and a half years  it has been reasonably more stable than in the previous decade (decline was @ 40% in 1991-2001) and has declined @ 22% as below ( from levels of Rs 46=US $ to Rs 56 US $

Declining Rupee Trend vs US $ 2001-2012


Assuming in the next Ten Years by 2022 the Indian Rupee declines @ 20 % to reach Rs 67 =US $ then the Returns to the Indian Investor who has taken a Treasury Note Exposure will be in excess of 21% read more