Recently, many people are looking for safe investment options, and especially why U.S. Treasury bonds are gaining attention. It's because the U.S. government’s credit rating is high and considered almost risk-free. Moreover, U.S. Treasury yields are quite attractive, and you can sell them anytime when needed, providing good liquidity.

First, let’s briefly understand what bonds are. Bonds are a type of IOU issued by the government or companies when they need funds. Investors receive the principal at the fixed maturity date and regularly receive interest payments in the meantime. U.S. Treasury bonds are the same. Depending on the maturity, they are divided into T-bills (less than 1 year), T-notes (1 to 10 years), and T-bonds (10 to 30 years). The 10-year Treasury bond is especially actively traded in the market and also serves as a benchmark for the global economy.

U.S. Treasury yields fluctuate in real-time based on market demand. When demand to buy bonds increases, prices go up and yields go down. Conversely, if demand decreases, prices fall and yields rise. In other words, bond prices and yields move in opposite directions.

The biggest advantage of investing in U.S. Treasuries is, of course, safety. Since the U.S. government guarantees repayment, the risk of default is almost nonexistent. This is why investors flock during economic downturns. The second advantage is predictable returns. With fixed interest rates and payments typically made every six months, it’s ideal for retirees needing steady income. The third is high liquidity. Because the bond market is active, you can easily sell when needed. Lastly, there are tax benefits. While federal taxes apply, state and local taxes are exempt, resulting in a higher after-tax return.

However, there are risks too. First, interest rate risk. If you buy bonds and later interest rates rise, new bonds will offer higher yields, and the value of your existing bonds will decline. If you need to sell quickly, you might incur losses. Second, inflation risk. If Treasury yields do not keep pace with inflation, real returns decrease. While Treasury Inflation-Protected Securities (TIPS) exist, regular bonds lack such protection. Third, exchange rate risk. For Korean investors, fluctuations in the dollar exchange rate affect returns. If the dollar weakens, the value converted to won may decline. Fourth, credit risk, which is theoretically possible, but the probability of the U.S. government defaulting is extremely low.

There are three main ways to invest in U.S. Treasuries. The first is direct purchase. You can buy bonds directly from the U.S. government via the TreasuryDirect website. The advantages are no fees and regular interest payments if held until maturity. The downside is that you can only buy up to $10k at a time, and managing multiple bonds requires more funds and effort. If interest rates rise after purchase, you might have to sell at a discount. This method is suitable for conservative investors planning long-term holding.

The second is bond funds. These pool money from multiple investors to manage a diversified bond portfolio. The benefit is professional management and the ability to diversify with small amounts of money. The downside is management fees that can reduce returns and lack of control over individual bonds. It’s suitable for investors seeking professional management and diversification.

The third is bond ETFs. These are exchange-traded funds that track specific bond indices. The advantage is much lower management fees compared to actively managed funds. They can be bought and sold freely on stock exchanges, offering good liquidity. The downside is market volatility and potential tracking errors with the index. They do not offer the active management benefits of funds. Ideal for those who want low-cost passive investing.

For Korean investors, holding both Korean and U.S. Treasuries can be considered. Since the economies of the two countries don’t always move in the same direction, one can offset the other if one underperforms. Exchange rate fluctuations also partially offset each other. When the won weakens, the dollar-denominated value of U.S. Treasuries rises, and vice versa, Korean bonds provide stability. Since interest rates vary by country, you can adjust your portfolio to favor the higher-yielding option.

Korean investors should pay particular attention to currency risk. Even if U.S. Treasury yields are attractive, a weakening dollar can reduce returns. Hedging currency risk can fix exchange rate fluctuations, but then you miss out on favorable currency movements. Some investors hedge only part of their exposure and leave the rest unhedged. Additionally, consider the duration of bonds (sensitivity to interest rate changes). For long-term holding, longer-maturity bonds tend to be more stable. Tax considerations are also important; U.S. Treasury interest is subject to U.S. federal tax but may also be taxed in Korea. The Korea-U.S. double taxation treaty can help, so consulting a tax professional is recommended.

For example, consider a portfolio composed of 50% Korean bonds and 50% U.S. Treasuries. This diversification reduces dependence on one economy. When the dollar is strong, the unhedged portion of U.S. Treasuries yields good returns. When the dollar weakens, the hedged portion offsets currency losses.

Ultimately, U.S. Treasuries are a stable choice for both individual and institutional investors. However, understanding the risks related to interest rate changes, inflation, and exchange rates is crucial. For Korean investors, combining domestic and U.S. bonds can pursue both returns and stability. Choosing among direct purchase, funds, or ETFs depends on your situation and preferences. Using platforms like Gate to review various asset information and develop your investment strategy is also a good approach.