Things investors must know before investing in U.S. Treasury bonds

In today’s environment of increasing economic uncertainty, many individual and institutional investors are contemplating how to build a stable asset portfolio. Among these, the U.S. Treasury yields are considered one of the most important indicators in the global financial markets. U.S. Treasury securities, backed by the U.S. government’s creditworthiness, offering excellent liquidity and realistic interest income opportunities, are driving broad investment demand—from conservative investors to professionals seeking portfolio diversification.

This article systematically explores everything from the basic concepts of U.S. Treasury securities, actual investment methods, inherent risks, to practical strategies tailored especially for Korean investors. In particular, we will clarify the meaning of U.S. Treasury yields so that you can make investment decisions aligned with your asset situation and risk appetite.

Definition and Basic Mechanism of Treasury Securities

What is a bond?

A bond essentially functions as a loan agreement. When an investor lends a certain amount to a debtor( such as the government or a corporation), the debtor agrees to repay the principal at a predetermined maturity date and to pay regular interest until then. Typically, interest is paid semiannually or annually.

The government issues Treasury securities to raise funds necessary for national operations. It borrows from domestic and international investors because tax revenues alone are insufficient. Investors are compensated through interest payments.

The most actively traded product in the U.S. Treasury market is the 10-year Treasury note. It offers a suitable maturity period with the potential for long-term returns, making it popular among both institutions and individuals.

Types of U.S. Treasury Securities and Characteristics of U.S. Treasury Yields

Maturity-based classification

U.S. government-issued Treasury securities are divided into three main types:

Short-term T-bills( have maturities of less than one year, characterized by very low risk and high liquidity. Medium-term T-notes) have maturities ranging from 1 to 10 years, offering a balanced risk-return profile. Long-term T-bonds( have maturities from over 10 up to 30 years, providing fixed interest but being more affected by interest rate fluctuations.

) Understanding the relationship between interest rates and yields

U.S. Treasury yields are defined as the expected return divided by the purchase price when buying Treasury securities. Since the trading price in the spot market can differ from the issuance price, yields fluctuate in real-time based on market demand.

The core principle is the inverse relationship between bond prices and interest rates. When demand for Treasuries increases, prices rise and yields fall. Conversely, when demand decreases, prices fall and yields rise. This mechanism clearly reflects investor market sentiment and economic expectations.

In particular, the 10-year U.S. Treasury yield is a key indicator for assessing the macroeconomic health of the global economy. During times of economic instability, demand for long-term bonds often increases, leading to an inverted yield curve where long-term yields fall below short-term yields.

Major Advantages of Investing in U.S. Treasury Securities

( 1. Top-tier safety

Since the U.S. government fully guarantees principal and interest payments, Treasury securities are regarded as virtually risk-free assets. This confidence is why investors flock to U.S. Treasuries during volatile market periods.

) 2. Predictable income stream

Fixed interest rates are established at issuance, with interest typically paid semiannually. This predictability makes Treasuries ideal for retirees or conservative investors seeking stable cash flows.

3. Excellent market liquidity

The Treasury market is the largest bond market worldwide, with high trading volume. Investors can hold to maturity or sell easily at any time, providing great flexibility in asset allocation.

( 4. Tax benefits

Interest income from U.S. Treasuries is subject to federal income tax but exempt from state and local taxes. This can result in a relatively higher after-tax return compared to other bonds or deposit products.

Risks to Consider When Investing in U.S. Treasury Securities

) 1. Interest rate risk

If market interest rates rise after purchase, newly issued Treasuries will offer higher yields, making existing lower-yielding bonds less attractive and causing their prices to fall. Selling before maturity in such a scenario may result in losses.

2. Inflation risk

Since fixed-rate Treasuries do not adjust for inflation, rising inflation rates can erode real returns. For example, earning 3% interest while inflation is 4% results in a real loss. Treasury Inflation-Protected Securities (TIPS) mitigate this risk partially, but regular Treasuries do not.

3. Currency risk

For Korean investors, fluctuations in exchange rates directly impact returns when converting dollar-denominated assets into Korean won. A weakening dollar can reduce the value of interest and principal when converted back to won, leading to potential losses.

( 4. Credit risk

While the likelihood of U.S. government default is extremely low, it is not zero. Political deadlock or economic crises could, in worst cases, threaten repayment. However, given the U.S. credit rating remains at the highest level, this risk is relatively minimal.

Three Ways to Invest in U.S. Treasury Securities

) 1. Direct purchase

Buy newly issued Treasuries directly via the U.S. Treasury website###TreasuryDirect### or purchase existing securities through domestic brokerages in the secondary market.

Advantages:

• Full control over investment decisions
• No management fees unlike mutual funds or ETFs
• Full principal and interest repayment if held to maturity

Disadvantages:

• Limit of up to $10,000 per purchase
• Need to buy multiple types for diversification, increasing management complexity
• Potential losses if sold before maturity during rising interest rate environments

Suitable for: Conservative investors aiming for stable income with long-term holding, retirees relying on regular interest payments

( 2. Bond funds

Invest through pooled funds managed by professional fund managers, holding diversified bond portfolios.

Advantages:

• Risk diversification across various bonds
• Active management and portfolio adjustment by experts
• Low initial investment required for diversification

Disadvantages:

• Management fees reduce net returns
• No direct control over individual bonds

Suitable for: Investors seeking to avoid management complexity, preferring expert advice, and aiming for stable long-term income with risk mitigation

) 3. Treasury index funds(ETF)

Exchange-traded funds that track specific Treasury bond indices, e.g., U.S. Treasury bond index funds.

Advantages:

• Lower fees compared to actively managed funds
• Trade freely on stock exchanges like stocks
• High liquidity and transparency

Disadvantages:

• Price fluctuations similar to stocks
• Tracking error may occur
• No active management benefits during market downturns

Suitable for: Cost-conscious investors, individuals preferring direct investment, passive investors trusting market efficiency

Portfolio Strategies for Korean Investors

Diversified investment combining Korean and U.S. Treasuries

Holding both Korean and U.S. Treasuries can provide multi-layered risk mitigation through regional diversification, currency diversification, and exploiting different economic cycles. Simultaneous holdings in KRW and USD-denominated assets naturally hedge against exchange rate fluctuations.

Currency hedging strategies

Invest a portion of U.S. Treasury funds with forward contracts or options to lock in exchange rates, while leaving some exposure unhedged. This approach protects against losses from currency depreciation while allowing gains during favorable exchange rate movements.

( Duration management

Adjust sensitivity to interest rate changes by considering the average duration of bonds held. Prioritize longer-duration Treasuries for principal preservation, or increase short-term bonds if liquidity is a priority.

) Tax optimization

Korea and the U.S. have a Double Taxation Agreement (DTA). Consulting tax professionals is essential to avoid double taxation on U.S. Treasury interest income, which is taxed at the federal level in the U.S. and may be taxed in Korea.

Practical Investment Example

Suppose a balanced portfolio consists of 50% Korean Treasuries and 50% U.S. Treasuries. This setup significantly reduces dependence on any single country’s economy while capturing the benefits of U.S. Treasury yields and Korean bond yields.

Considering exchange rates, you can hedge 50% of U.S. Treasuries and keep the rest exposed. During dollar appreciation, the unhedged portion yields additional gains; during dollar depreciation, the hedged portion offsets losses.

Final Summary

To properly understand U.S. Treasury yields and make informed investment decisions, it is essential to comprehensively evaluate various risks such as interest rates, inflation, and exchange rates. For Korean investors, a balanced combination of Korean and U.S. Treasuries can achieve both portfolio stability and profitability.

Investment methods—whether direct purchase, bond funds, or ETFs—should be chosen based on individual asset size, management capacity, and risk preference. Most importantly, establishing a consistent long-term strategy is key to successful bond investing.