Buying US bonds from Spain: the real routes and hidden costs

US bonds from Spain: currency hedging eats the coupon

Spanish investors who want to buy US Treasury debt face an uncomfortable reality: the primary market is designed for residents. Non-residents are left with the intermediary route, and there the range of options reveals that the real problem is not access, but the exchange rate.

Direct access: residents only

Buying American bonds from the Treasury requires a US address. Non-residents need to go through a broker with a fixed-income platform or through institutions with telephone service. Some asset managers offer funds that invest in American government debt, such as the MFS US Government Bond range, available through banks like Openbank, or ETFs with medium durations such as TLT, which is nevertheless not available to European investors and has a euro equivalent, iShares' IS04. Another route is single-bond ETFs that mature on a specific date, but buying them from Spain also comes with restrictions.

ETFs are not bonds: the maturity trap

The difference between buying the bond directly and doing so through a fund or ETF is substantial. Whoever buys the security knows that at maturity they recover the principal, unless the issuer goes bankrupt. With a fund, the portfolio is constantly renewed and returns depend on the price at which units are bought and sold. In a rising-rate environment, bond prices fall and the fund can lose as much as 10% in a year, as the data for long-duration ETFs showed. The alternative of fixed-maturity ETFs, which replicate a single bond until its redemption, is the closest thing to a direct purchase, but their catalogue does not always reach the European retail investor.

Currency hedging: a cost nobody mentions

The silent problem is the dollar. Once the bond is bought, the investor assumes exchange-rate risk for the entire life of the security. If they do not want to take it on, they must arrange a hedge with futures, swaps or CFDs, and there the cost eats up a significant part of the coupon. The interest rate differential between the United States and the eurozone stood at around two percentage points: that is the price of eliminating currency risk. For short horizons, the added cost can miccionan the trade is not worth it compared with European sovereign debt.

European alternatives: the shortcut without the dollar

In fact, the technical and practical discussion led to an uncomfortable conclusion for advocates of the American bond: if you do not want dollar exposure, buying German bonds delivers the same result without the need for hedging. And if the goal is to hold them to maturity, one-year Italian debt offers a higher yield with reasonable risk. With the curve at around 4% at ten years, American debt looked attractive for building a portfolio, but the currency hurdle left the trade half-done for the small investor.

The rational calculation, once fees, taxes and hedging are added up, pushes many to stay in European debt. But anyone who genuinely wants dollars has one route: open an account with an international broker that has a secondary bond market and accept that the safe-haven asset also has an entry price. The yield on the American bond always ends up tied to the exchange rate.