These days, it's not easy to find truly safe investment options in the market, but many people are turning their attention to U.S. Treasury bonds. This is because of the belief that the likelihood of the U.S. failing is almost zero, making them a flagship safe asset. Although interest rates are low, they can be converted into cash at any time, and they also provide steady interest income, which is very attractive. Today, I’ve summarized how to buy U.S. Treasury bonds and investment strategies for those interested, especially from the perspective of Korean investors, including points to consider.

First, to briefly explain what bonds are, they are basically similar to debt certificates. Investors lend money and later receive the principal along with interest. The government does the same; if it lacks funds for national operations, it issues bonds to borrow money from individuals or institutions and pays interest in return. The most actively traded product in the bond market is the 10-year U.S. Treasury bond, which is mainly traded for investment purposes rather than for holding.

U.S. Treasury bonds issued by the U.S. Department of the Treasury are mainly three types. T-bills are short-term bonds with maturities within one year, T-notes are medium-term bonds with maturities between 1 and 10 years, and T-bonds are long-term bonds with maturities from 10 to 30 years. The longer the maturity, the greater the future uncertainty, so generally, long-term bond yields should be higher. However, if the economy is weak, demand for safe long-term bonds increases, which can actually cause yields to fall.

Bond yields are understood as the expected return divided by the purchase price, i.e., the yield. In the secondary market, prices and yields fluctuate in real-time based on demand. When demand for Treasury bonds as safe assets increases, prices go up and yields go down. Conversely, if demand decreases, prices fall and yields rise. In other words, prices and yields move in opposite directions, and yields reflect investor sentiment.

The biggest advantage of investing in U.S. Treasury bonds is their exceptional safety. The U.S. government guarantees repayment, so the risk of default is almost nonexistent. This is why many investors flock to this product during economic downturns. The second advantage is predictable returns: fixed interest rates are set at issuance, and interest is usually paid every six months, making them ideal for retirees or those needing stable income. The third is high liquidity: U.S. Treasury bonds are actively traded in the market, so you can sell them whenever needed without waiting for maturity. Lastly, there are tax benefits: while interest from Treasury bonds is subject to federal tax, it is exempt from state and local taxes, potentially increasing after-tax returns.

Of course, there are risks. The most straightforward is interest rate risk: if rates rise after purchase, new bonds will offer higher yields, causing the value of existing bonds to fall. If you need to sell before maturity, you might incur losses. Inflation risk is also present: since the interest rate is fixed, if inflation rises faster than the interest earned, the real value of your investment can decrease. While Treasury Inflation-Protected Securities (TIPS) address this, regular bonds do not have such protections. For foreign investors, exchange rate risk is also important: if the dollar weakens, the value of interest and principal when converted to the local currency (e.g., Korean won) can decrease. Lastly, there is credit risk—the possibility that the U.S. government might default on its debt. Although theoretically possible, the risk is extremely low given the high credit rating of the U.S.

Now, let’s look at how to buy Treasury bonds. There are three main methods. The first is purchasing directly, either from the U.S. government or through securities firms in the secondary market. Using the TreasuryDirect website, you can buy directly from the government. The advantages are no intermediary fees, receiving regular interest payments until maturity, and full control over your investment decisions. The disadvantages are that individual investment limits are capped at $10k, and diversifying across multiple bonds requires significant funds and management. If interest rates rise before maturity, you might have to sell at a discount. This method is suitable for conservative investors seeking stable income over the long term, especially retirees or those managing their portfolios personally.

The second method is through bond funds. These pool money from multiple investors to create a diversified bond portfolio managed by professionals. The benefits include diversification, reducing risk associated with individual bonds, active management adapting to market conditions, and the ability to invest with smaller amounts. The drawbacks are management fees that can reduce overall returns and lack of direct control over individual bonds. This approach suits investors who prefer professional management and diversification without the hassle of managing individual bonds, and those seeking long-term income with risk mitigation.

The third method involves bond index funds or ETFs that track specific bond indices. The advantage is passive management, which generally results in lower costs compared to actively managed funds, and the ability to buy and sell on stock exchanges for high liquidity and flexibility. The disadvantages include exposure to market volatility similar to stocks, potential price fluctuations even if the underlying bonds are stable, and the inability to benefit from active management’s potential upside. This approach is suitable for investors who want minimal fees, prefer direct investment over fund managers, and believe in market efficiency and passive investing.

For Korean investors, considering both Korean and U.S. Treasury bonds can be a good strategy. Diversifying by region and currency reduces exposure to economic risks in a single country. Holding bonds denominated in Korean won and U.S. dollars can also offset some currency risk: if the won weakens, the value of U.S. bonds in won terms rises, and vice versa. Since economic cycles differ between the two countries, a downturn in one can be offset by growth in the other, smoothing out yield fluctuations.

From a yield optimization perspective, you can also leverage the interest rate differences between the two countries. For example, if Korean bonds offer higher yields, you might maintain a core holding of U.S. bonds for safety while increasing exposure to Korean bonds. When the interest rate gap widens, arbitrage opportunities arise—borrowing in a low-interest currency to invest in a high-interest currency can generate profits.

The most critical aspect for Korean investors in U.S. Treasuries is currency risk. Fluctuations in the dollar exchange rate directly impact returns when converted to won. Currency hedging, using derivatives like forward contracts, can lock in exchange rates, reducing risk but also potentially lowering returns. Some investors hedge only part of their holdings to balance risk reduction and potential gains. This way, they can manage costs and still benefit from favorable currency movements.

Duration is also important; it measures a bond’s sensitivity to interest rate changes. Considering the duration of both Korean and U.S. bonds helps align investments with your goals and risk tolerance. For long-term principal preservation, a portfolio composed of long-term U.S. bonds can provide stable and predictable income. Conversely, mixing in shorter-duration bonds can reduce sensitivity to interest rate fluctuations.

Tax considerations are essential too. Interest income from U.S. Treasury bonds is subject to U.S. federal tax but can also be taxed in Korea. Fortunately, the U.S. and Korea have a double taxation treaty to prevent double taxation. Consulting a tax professional is recommended to understand the exact tax implications.

For example, a balanced portfolio with 50% Korean bonds and 50% U.S. bonds aims to achieve principal safety and income generation while reducing dependence on a single economy. Currency fluctuations can cause the portfolio’s value in won to vary; investors might hedge only part of their U.S. bond holdings—say, 50%. When the dollar is strong, unhedged portions can yield higher returns in won; when the dollar weakens, hedged portions can offset losses.

In conclusion, investing in U.S. Treasury bonds offers stable opportunities for both individual and institutional investors. To earn consistent returns, understanding interest rate, inflation, and currency risks is crucial. Korean investors can diversify by investing in both U.S. and Korean bonds to enhance portfolio stability and income. The methods to buy bonds—direct purchase, funds, ETFs—are varied, so choosing the approach that fits your circumstances and risk appetite is key. Carefully weighing the pros and cons of each investment method is the wise choice.