The Perfect Guide to Investing in U.S. Treasury Bonds for Stable Asset Allocation

As economic uncertainty increases, many investors are seeking investment instruments that simultaneously preserve principal and generate regular income. In this context, U.S. Treasury securities serve as a safe asset representing the global economy and act as a key indicator in the international financial markets. Despite their low risk, U.S. Treasury yields offer sufficient liquidity and predictable cash flows, making them an essential component of investors’ portfolios.

This article systematically covers the basic concepts of government bonds, the meaning of U.S. Treasury yields, various investment methods, and specific currency management strategies that Korean investors should pay close attention to.

Understanding the Nature of Government Bonds and Bonds

Investing in government bonds essentially means lending money to the government. In return, the government pays interest at predetermined intervals and repays the full principal amount at maturity.

Government bonds issued to finance national operations are accessible not only to institutional investors but also to individual investors. Notably, the 10-year U.S. Treasury note is the most widely traded government security in the global financial markets and functions as a key macroeconomic indicator for assessing the health of the global economy.

Classification System and Yield Structure of U.S. Treasury Securities

U.S. government-issued bonds are categorized based on their maturity periods into three types:

Short-term Treasury(Treasury Bill): Maturities of less than one year, with characteristics close to risk-free.

Medium-term Treasury(Treasury Note): Maturities from over one year up to less than ten years, offering moderate yields.

Long-term Treasury(Treasury Bond): Maturities from over ten up to thirty years, with fixed interest rates.

###Inverse Relationship Between Interest Rates and Yields

The yield of bonds traded in the market is not just the stated coupon rate. Actual yields fluctuate in real-time based on the purchase price paid by investors.

Inverse relationship between interest rates and bond prices: When demand for safe assets like Treasury bonds increases, bond prices rise, and consequently, U.S. Treasury yields fall. Conversely, if demand decreases, prices decline, and yields rise. This relationship serves as a barometer reflecting market sentiment and economic outlook.

During economic downturns, demand for long-term bonds tends to surge. This often causes an inversion of the yield curve, where long-term yields fall below short-term yields, signaling potential recession.

Key Attractions of Investing in U.S. Treasury Securities

1. Top Creditworthiness and Safety

Since the U.S. government guarantees repayment, Treasury securities are virtually free of default risk. This high reliability is why many investors seek them as a safe haven during economic crises.

2. Fixed Income Streams

The fixed interest rate determined at issuance remains unchanged, with interest typically paid semiannually. This provides a stable cash flow, making them ideal for retirees or conservative investors seeking predictable income.

3. Excellent Market Liquidity

U.S. Treasuries are among the most actively traded securities in the bond market. They can be quickly sold before maturity if needed, providing high liquidity that allows flexible portfolio management.

4. Tax Advantages

Interest income from U.S. Treasuries is subject to federal income tax but is exempt from state and local taxes. This results in a higher after-tax net yield.

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

( 1. Losses Due to Interest Rate Fluctuations

If market interest rates rise after purchasing bonds, newly issued Treasuries will offer higher yields. As a result, the market value of existing bonds declines, and selling before maturity may incur losses.

) 2. Erosion of Real Value Due to Inflation

If fixed interest payments do not keep pace with inflation, the real return on investment diminishes over time. Treasury Inflation-Protected Securities (TIPS) are designed to mitigate this risk, but standard Treasuries do not offer such protection.

( 3. Additional Losses from Currency Volatility

For foreign investors, exchange rate risk is a significant factor. If the U.S. dollar weakens, the value of interest and principal in local currency terms decreases.

) 4. Possibility of Government Credit Deterioration

Although highly unlikely, there is a theoretical risk that the U.S. government could default on its debt obligations. However, given the high credit rating of the U.S., this risk is minimal.

Choosing and Comparing Methods of Purchasing U.S. Treasury Securities

Investors can select from three different investment routes based on their goals, risk appetite, and operational capacity.

Method 1: Direct Purchase of Individual Bonds

Buying bonds directly through official government platforms or securities firms. In the U.S., individuals can purchase directly from the Treasury via the TreasuryDirect website.

Advantages: Full control over bond ownership, no fund management fees. Holding to maturity guarantees regular interest payments and full principal repayment.

Disadvantages: Individual purchase limits are set at $10,000 per auction. Diversification requires substantial capital and management effort. Early sale during rising interest rates may require selling at a discount.

Suitable for: Conservative investors with long-term holding goals, retirees seeking regular income, investors who prefer direct portfolio management.

Method 2: Indirect Investment via Bond Funds

Pooling funds from multiple investors to create a diversified bond portfolio managed by professional fund managers, typically in mutual funds.

Advantages: Diversification reduces risk associated with individual bonds. Active management adjusts portfolios according to market conditions. Access to various bond assets with a smaller initial investment.

Disadvantages: Management fees reduce net returns. No direct control over individual bonds.

Suitable for: Investors seeking professional management, risk-averse investors aiming for stable long-term returns through diversification.

( Method 3: Cost-Effective Investment Using Bond Index Funds)ETF###

Exchange-traded funds designed to track specific bond indices.

Advantages: Passive management results in significantly lower operating costs compared to active funds. Can be traded freely on stock exchanges with high liquidity.

Disadvantages: Price volatility influenced by stock market fluctuations, even if the underlying bonds are stable. Tracking error may occur. No active management to respond to market opportunities.

Suitable for: Investors seeking low-cost investment options, those who prefer direct investment, and passive investors trusting market efficiency.

Integrated Strategies for Korean Investors: Combining Domestic and International Bonds

Balancing Korean government bonds and U.S. Treasuries can build a more resilient portfolio.

Risk Diversification Across Regions

Economic cycles in Korea and the U.S. do not always align. A recession in one may be offset by growth in the other, reducing overall portfolio volatility.

Benefits of Currency Diversification

Holding assets denominated in KRW and USD naturally hedges against exchange rate risk.

Implementing Currency Hedging Strategies

Partial Hedging: Hedging only 50% of U.S. Treasury investment via forward contracts, leaving the rest exposed. This approach limits losses if the dollar weakens while capturing gains if it strengthens.

Currently, with the dollar appreciating, unhedged positions tend to yield higher returns. If the dollar weakens in the future, hedged portions can buffer losses.

Managing Interest Rate Sensitivity

Duration measures a bond’s sensitivity to interest rate changes. When constructing a portfolio, consider the durations of both Korean and U.S. Treasuries to align with investment goals and risk tolerance.

For principal preservation, longer-duration bonds provide predictable returns. To reduce sensitivity to interest rate fluctuations, include shorter-duration bonds.

( Tax Optimization

Interest income from U.S. Treasuries is taxable in the U.S., but double taxation is prevented by the Korea-U.S. Double Taxation Agreement (DTA). Consulting tax professionals is recommended to develop optimal tax strategies.

Conclusion

A precise understanding of U.S. Treasury yields is the first step toward stable global asset allocation. By systematically managing risks related to interest rates, inflation, and exchange rates, U.S. Treasuries can serve as a reliable income source and a core stabilizer in your portfolio.

For Korean investors, combining U.S. Treasuries with domestic bonds can mitigate regional risks and effectively secure U.S. Treasury yields. Choosing the appropriate investment method—be it direct purchase, bond funds, or ETFs—based on individual circumstances, can support long-term wealth growth.