- STRIPS are traditionally associated with short-term trading, but they can also form part of your long-term endowment plan.
- Some advantages include the lack of reinvestment risks involved (of coupons) and the low initial investment outlay required.
- Investors looking for a low-risk option to earn around 4.5% p.a. in capital gains over a long period can consider STRIPS.
What are STRIPS?
Treasury STRIPS are a novel way for investors looking to buy US Treasuries (USTs). In short, STRIPS involve the separation or ‘stripping’ of the principal and coupons of a UST and hence could be useful to investors who do not want or need regular income from coupon payments (i.e. they only want the principal repayment).
Table 1 summarises the differences and similarities between STRIPS and unstripped USTs – key differences include their underlying cashflows, reinvestment risks involved, and duration exposures. To better illustrate their numerical differences, we also compare 30y STRIPs with 30y USTs in Table 2, where we particularly note the differences in duration and price.
Find out more: Decoding Treasury STRIPS: A new way to invest in US Treasuries
Table 1: Summary comparison between STRIPS and unstripped USTs
| STRIPS (vs unstripped USTs) | STRIPS | Unstripped USTs |
| Cashflows | Single cashflow (principal) | Multiple cashflows (coupons + principal) |
| Reinvestment risks (of coupons) | No | Yes |
| Initial cash outlay | Lower cash outlay | Higher cash outlay |
| Minimum investment amount | AI: $1k ($100 denominations) Retail: SGD 200k (similar for both) | |
| Default risks | Extremely low (similar for both) | |
| Investment time horizon | Flexible - available at most tenors (similar for both) | |
| Duration | Higher | Lower |
| FX risks | Yes for non-USD investors (similar for both) | |
| Source: Bloomberg, iFAST compilations, iFAST estimates. Data as of 6 Feb 2025. | ||
Table 2: Key metrics of 30y STRIPS and 30y UST
| Metric | SP 0 15Nov2054 Govt (USD) | T 4.500% 15Nov2054 Govt (USD) |
| Type of Product | US Treasury STRIPS | US Treasury (Unstripped) |
| Maturity | 29.8y | 29.8y |
| Modified Duration | 29.1y | 15.9y |
| Yield | 4.6% | 4.7% |
| Price | 26.0 | 97.0 |
| Coupon | - | 4.5% |
| Source: Bloomberg, iFAST compilations. Data as of 7 Feb 2025. | ||
8 things you need to know about STRIPS
1. Simpler cashflows
STRIPS have the advantage of simpler cashflows compared to unstripped USTs. This is because they are essentially zero-coupon bonds, hence investors only need to worry about a single cashflow: principal repayment on maturity. On the other hand, for traditional unstripped USTs, investors would have to track incoming cashflows on each coupon date (twice a year) on top of the eventual principal repayment.
2. No reinvestment risks (for coupons)
Another advantage of STRIPS is that investors do not need to worry about reinvesting their coupons, simply because there are no coupons to invest. Meanwhile, holders of unstripped USTs will have to contend with the regular semi-annual coupon payments. Using the example in Table 2, investors would receive 4.5% in coupons annually (or 2.25% every 6 months) – if they invested USD 200,000, that would equate to USD 4,500 that would have to be reinvested every 6 months.
With that being said, the lack of reinvestment risks also translates to the absence of regular income from coupon payments - investors should also consider whether they require regular income. STRIPS are better suited for those who do not require regular income from their bond investments (e.g. those who are still working).
3. Lower initial cash outlay
STRIPS can also help you achieve your long-term investment objectives at a relatively low initial cash outlay. The zero-coupon nature of STRIPS means that they trade at discounts to par. Long-tenor STRIPS in particular can trade at deep discounts - around 26 cents on the dollar for 30y STRIPS. As an example, if you are looking to amass USD 1m in 30 years, you would only need to invest around USD 250k today in a very low-risk asset (see point 4 below).
4. Low minimum investment amount
Accredited investors can purchase STRIPS (and USTs) in small amounts starting at just $1,000, and in $100 denominations after. This makes STRIPS a good ‘low-cost’ income tool for accredited investors. Retail investors are however subject to a regulatory minimum of SGD 200k for their transaction – remember to check your eligibility for an ‘Accredited Investor’ status to see if you qualify for this low minimum investment amount!
5. Low default risks
STRIPS – similar to unstripped USTS - are suitable for those who have a low risk tolerance and/or seek to preserve capital. STRIPS are essentially backed by the full faith and credit of the US Government – we think their probabilities of default remain extremely low, and our view is affirmed by the US Government’s strong issuer rating (AA+ to AAA).
6. Flexible investment horizon
Investors can easily pick a STRIP with a maturity that suits their specific investment horizons, including those above 10 years and up to 30 years. This is helped by the fact that the UST market is one of the largest and deepest (most liquid) markets in the world, while STRIPS are also widely traded across multiple tenors.
7. Come with higher duration risks
STRIPS can have significantly larger durations compared to their corresponding unstripped UST due to their zero-coupon nature (see Table 2 above). Consequently, while their yields track each other very closely (Chart 1), STRIPS will see larger mark-to-market price movements (Chart 2).
We also do a simple sensitivity analysis on the STRIPS above, to see respective mark-to-market price movements if benchmark yields moved by 100bps, 75bps, 50bps, and so on (in 25bps intervals) (Chart 3). Chart 2 shows clearly the higher-duration nature of STRIPS which results in sharper price fluctuations. Investors who wish to hold them for the long term should be comfortable with potentially higher fluctuations from STRIPS.
Put another way, purchasing a set of STRIPS essentially means locking in their yields, which today hovers around the 4.5% level – this implies about 4.5% in capital appreciation per year for the next 30 years. This ‘guaranteed’ 4.5% level (assuming no defaults) could potentially look less attractive if benchmark yields shift higher than 4.5%, and there would be an opportunity cost as investors would be able to buy these STRIPS at higher yields now.
Chart 1: Same-maturity USTs and STRIPS trade at very similar yields …
Chart 2: … but their price returns diverge significantly (STRIPS are more volatile)
Chart 3: Sensitivity analysis – what happens if benchmark yields change?
8. FX risks for non-USD investors
If an investor intends to use their proceeds for non-USD purposes, they are exposed to FX risks as their proceeds will be in USD. For example, suppose a Singaporean investor wishes to buy STRIPS today and use the proceeds on maturity (e.g. in 30 years) to buy an asset denominated in SGD; in this case, if the USD depreciates against the SGD over 30 years, the eventual return in SGD may be lower than the 4.5% in USD.
Who should consider STRIPS?
The combination of these factors makes long-maturity STRIPS most suitable for (i) long-term and (ii) high-priority investment objectives – essentially similar to an endowment.
For instance, investors might wish to set aside a large monetary gift to subsequent generations. This monetary gift could be targeted at specific use cases for their kids, including a university education (which is costly yet important for many parents), a downpayment for a house, or a wedding. More generally speaking, it can be seen as an attractive-yielding ‘savings account’ that can be transferred to their children as they reach adulthood (and can open their own investment accounts).
Another use case is for retirement. Some investors foresee themselves being employed for the upcoming years and therefore do not need an income stream today, but still wish to save for their retirement in a certain number of years. They may also already have a pre-determined retirement amount in mind. In these cases, investing in STRIPS may be suitable, since the principal received on maturity (assuming no default) is known beforehand, without the hassle of receiving a constant income stream before then.
Alternatively, short-term traders can also consider STRIPS as a duration play. Given their potentially extremely long durations, STRIPS may see large mark-to-market price increases if benchmark yields fall. We emphasise however that they may also see large mark-to-market price declines if benchmark yields rise – our view today is that the pick-up for long-end STRIPS and USTs remains insufficient thus far, and we think it is premature to engage in such a duration play.
Final thoughts on STRIPS
Our Research Team generally advocates for shorter-duration products, given the prospect of higher-for-longer rates, and our view that the yield curve is not yet fully normalised (and could become more upward-sloping, especially on the long end). Nonetheless, there can be a case for long-maturity and long-duration products, depending on your own investment objectives.
For Treasury STRIPS (Table 2), they could be suitable for a low-risk portfolio, especially as it could potentially make over 4.5% p.a. in capital appreciation over a long time (e.g. 30 years). For those willing to look past near-term price fluctuations, be it for your own needs (e.g. retirement) or your children’s needs (e.g. university education), STRIPS could be an attractive option for your longer-term financial targets.
Table 3: List of STRIPS onboarded on our platform
| Bond Name | Maturity Date (Years to Maturity) | Ask Price | Yield to Call / Maturity (%) |
| SP ZERO 15Feb2036 Govt (USD) | 15 Feb 2036 (11.0) | 62.557 | 4.31% |
| SP ZERO 15Feb2037 Govt (USD) | 15 Feb 2037 (12.0) | 59.526 | 4.37% |
| SP ZERO 15May2037 Govt (USD) | 15 May 2037 (12.3) | 58.608 | 4.41% |
| SP ZERO 15Feb2038 Govt (USD) | 15 Feb 2038 (13.0) | 56.289 | 4.47% |
| SP ZERO 15May2038 Govt (USD) | 15 May 2038 (13.3) | 55.746 | 4.46% |
| SP ZERO 15Feb2039 Govt (USD) | 15 Feb 2039 (14.0) | 53.584 | 4.50% |
| SP ZERO 15May2039 Govt (USD) | 15 May 2039 (14.3) | 52.647 | 4.55% |
| SP ZERO 15Aug2039 Govt (USD) | 15 Aug 2039 (14.5) | 52.005 | 4.56% |
| SP ZERO 15Nov2039 Govt (USD) | 15 Nov 2039 (14.8) | 51.335 | 4.57% |
| SP ZERO 15Feb2040 Govt (USD) | 15 Feb 2040 (15.0) | 50.660 | 4.58% |
| SP ZERO 15May2040 Govt (USD) | 15 May 2040 (15.3) | 49.964 | 4.60% |
| SP ZERO 15Aug2040 Govt (USD) | 15 Aug 2040 (15.5) | 49.315 | 4.61% |
| SP ZERO 15Nov2040 Govt (USD) | 15 Nov 2040 (15.8) | 48.713 | 4.62% |
| SP ZERO 15May2050 Govt (USD) | 15 May 2050 (25.3) | 30.531 | 4.75% |
| SP ZERO 15Aug2053 Govt (USD) | 15 Aug 2053 (28.5) | 27.117 | 4.63% |
| SP ZERO 15Feb2054 Govt (USD) | 15 Feb 2054 (29.0) | 26.707 | 4.60% |
| SP ZERO 15May2054 Govt (USD) | 15 May 2054 (29.3) | 26.577 | 4.58% |
| Source: Bloomberg, Bondsupermart, iFAST compilations. Data as of 7 Feb 2025. | |||
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in various USTs but not STRIPS, including T 4.500% 15Feb2036 Govt (USD) and T 4.375% 15Nov2039 Govt (USD). The analyst who produced this report holds an NIL position in the abovementioned securities.
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