Recently, as the economy becomes more unstable, many people are looking for safe investment options. In particular, U.S. government-backed treasury bonds are regarded as the most reliable assets. They offer low interest rates but can be cashized at any time, and provide regular interest income, which is attractive. Today, we will organize how to buy U.S. bonds and the key points investors need to know.

First, simply put, bonds are a type of IOU where investors lend money to the government or companies and receive repayment. When the government lacks funds for national operations, it issues treasury bonds to borrow money from citizens, paying regular interest in return. The most actively traded product in the bond market is the U.S. 10-year Treasury note, mainly bought and sold for investment purposes.

U.S. Treasury bonds issued by the U.S. Department of the Treasury are divided into three types based on maturity. T-bills are short-term instruments under one year, with almost no risk and high liquidity. T-notes are medium-term instruments with maturities of 1 to 10 years, and T-bonds are long-term with maturities of 10 to 30 years, offering fixed interest rates. During economic downturns, these stable bonds play an important role in investment portfolios.

Understanding the relationship between interest rates and yields is crucial. Bond yield is the expected return divided by the purchase price, but it varies from the issuance price when traded in the market. When demand for Treasury bonds increases, prices go up and yields go down. Conversely, if demand decreases, prices fall and yields rise. Ultimately, bond prices and yields move in opposite directions, reflecting market sentiment.

There are three main ways to buy U.S. bonds. First is direct purchase, which can be done through the TreasuryDirect website, allowing direct buying from the Treasury. The advantage is no management fees, and holding until maturity yields regular interest and principal payments. The downside is a maximum limit of $10k per individual, and in a rising interest rate environment, selling before maturity could result in losses.

Second is through bond funds. These pool funds from multiple investors to manage a diversified bond portfolio, managed by professional fund managers. The benefits include diversification with a small amount of money and active management by experts. However, management fees are charged, which can reduce overall returns.

Third is using bond index funds or ETFs. These track specific bond indices, operate passively, and tend to have lower costs than actively managed funds. They can be bought and sold on stock exchanges, offering high liquidity. The downside is they are subject to market volatility and may have slight performance differences due to index tracking.

Summarizing the main advantages of investing in U.S. bonds: because the U.S. government guarantees repayment, they are highly safe; fixed interest rates set at issuance allow predictable returns; active trading in the bond market provides high liquidity; and interest earned on Treasury bonds is only subject to federal taxes, with exemptions from state and local taxes, offering tax benefits.

Of course, risks exist. Rising interest rates can decrease the value of existing bonds, and fixed rates may not keep up with inflation. For foreign investors, exchange rate fluctuations can impact returns, and there is theoretically a risk of U.S. government default (though with high credit ratings, this risk is very low).

For Korean investors, it’s advisable to consider both U.S. and Korean bonds. Diversifying by region and currency can reduce exposure to economic risks of a single country and help offset currency fluctuations. Since economic cycles of the two countries do not always align, this can lead to more stable yields.

When Korean investors buy U.S. bonds, there are additional considerations. To reduce losses from exchange rate fluctuations, derivatives like forward contracts can be used to hedge currency risk. However, this can also reduce potential gains, so some portion of the investment might be hedged while leaving the rest unhedged. Additionally, constructing a portfolio considering the bond’s duration (average maturity) can help manage sensitivity to interest rate changes. Tax considerations are also important; since Korea and the U.S. have a double taxation treaty, consulting a tax professional is recommended.

For example, consider a balanced portfolio composed of 50% Korean bonds and 50% U.S. bonds. This aims to preserve principal and generate income while reducing dependence on a single country's economy. When the U.S. dollar is strong, unhedged U.S. bonds may show higher returns when converted to Korean won, and when the dollar weakens, hedged portions can offset currency losses.

In conclusion, how to buy U.S. bonds depends on individual investment goals and risk tolerance. Choose from direct purchase, bond funds, or ETFs based on your situation, but it’s important to fully understand various risks such as interest rate fluctuations, inflation, and currency risk before investing. For Korean investors, diversifying with a mix of U.S. and domestic bonds can lead to more stable and reliable returns.