Generating Stable Income with U.S. Treasury Bonds: A Key Guide Every Investor Should Know

As market volatility increases, many investors are seeking safe assets. U.S. government-backed U.S. Treasury Bonds have become a core component of global investment portfolios. Although yields may seem low, their high liquidity and predictable cash flows make them preferred by conservative investors and institutional players alike. In this article, we will explore step-by-step how to invest in U.S. bonds and strategies to maximize returns.

Bond Market Basics: What Are You Buying?

Bonds are essentially loan agreements. When an investor provides funds to the borrower( government or corporation), the borrower agrees to pay interest over the contract period and return the principal at maturity. Governments issue treasury bonds to finance public projects and national operations, which are what we call U.S. Treasury Bonds.

The most actively traded product in the bond market is the 10-year maturity bond. In the secondary market, 10-year bonds are mainly traded by investors seeking short-term trading profits rather than long-term asset management, and they serve as benchmarks for global economic indicators.

Classification of U.S. Treasury Bonds: Choosing According to Investment Goals

U.S. Treasury securities issued by the U.S. Department of the Treasury are divided into three categories based on maturity.

T-Bill(Short-term Treasury) are ultra-short-term bonds with maturities under 1 year, offering minimal risk and quick liquidity. T-Note(Medium-term Treasury) have maturities from 1 to 10 years, while T-Bond(Long-term Treasury) are long-term bonds with maturities over 10 up to 30 years. All guarantee fixed interest rates.

In highly volatile markets, these treasuries serve to stabilize portfolios. Notably, U.S. Treasury yields act as global benchmark interest rates and are used as reference points for evaluating returns across various investment products.

The Relationship Between Interest Rates and Yields: Understanding the Inverse Movement

U.S. Treasury Yield( refers to the expected return ratio based on the bond’s purchase price. Interestingly, bond prices and interest rates move in opposite directions.

When safe asset demand increases, bond prices rise and yields fall. Conversely, if bond selling demand increases, prices decline and yields rise. This mechanism directly reflects market participants’ sentiment.

Four Attractions of Investing in U.S. Treasury Bonds

) 1. Top-Level Safety

Since the U.S. government guarantees repayment directly, U.S. Treasury Bonds are regarded as the safest assets. During economic downturns, many investors concentrate funds into these virtually default-risk-free bonds.

2. Stable Income Stream

They apply a fixed interest rate established at issuance, with interest paid typically semi-annually. Ideal for retirees or those needing regular cash flow.

3. Excellent Liquidity

The bond trading market is deep, allowing quick cash conversion when needed. You can hold until maturity or sell early in case of urgent funds.

4. Tax Benefits

Interest income from U.S. Treasury Bonds is subject to federal tax but exempt from state and local taxes, improving net after-tax returns.

Four Risks of Investing in U.S. Treasury Bonds

1. Interest Rate Rise Risk

If market interest rates rise after purchasing bonds, newly issued bonds will offer higher yields, causing existing bond prices to fall. Selling before maturity in such a scenario can lead to losses.

( 2. Inflation Risk

Due to fixed interest structures, if inflation exceeds the yield, real purchasing power diminishes. TIPS (Treasury Inflation-Protected Securities) are designed to mitigate this risk, but regular bonds do not offer such protection.

) 3. Exchange Rate Risk

For foreign investors, especially Korean investors, exchange rate fluctuations are critical. A weakening dollar reduces returns when converted to Korean won, while a strong dollar can generate additional gains.

( 4. Credit Risk

While theoretically possible, the risk of U.S. government default is extremely low given its high credit rating and long history of debt repayment.

Investment Methods: Choosing According to Goals and Situation

) Method 1: Direct Purchase

Buy U.S. Treasury Bonds directly from the U.S. Department of the Treasury via TreasuryDirect or through securities firms in the secondary market.

Advantages: Full ownership and control over individual bonds. No fund management fees, and you receive fixed interest and principal at maturity.

Disadvantages: Personal investment limit is up to $10,000. Diversification requires significant capital and management effort. Selling before maturity in a rising rate environment may incur losses.

Suitable for: Conservative investors planning to hold long-term for stable income, especially retirees or those preferring direct management.

Method 2: Bond Funds

Investors pool funds managed by professional fund managers who hold diversified bond portfolios.

Advantages: Diversification reduces individual bond risk. Active management adjusts portfolios according to market conditions. Accessible with smaller capital.

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

Suitable for: Investors seeking professional management and diversification, avoiding the hassle of managing individual bonds.

Method 3: Bond ETFs

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

Advantages: Lower fees compared to active funds, transparent index tracking, and high liquidity due to stock-like trading.

Disadvantages: Even with stable underlying assets, ETF prices are affected by market volatility. Management fees and trading costs can cause divergence from index returns. Limited potential for active management gains.

Suitable for: Investors wanting low-cost, passive exposure to bond indices, favoring simplicity and liquidity.

Strategies for Korean Investors: Blended Bond Portfolios

( Currency Hedging Strategy

The biggest concern for Korean investors is exchange rate fluctuation. When the won weakens against the dollar, returns in won decrease; when the dollar strengthens, gains increase. Using derivatives like forward contracts to lock in exchange rates reduces currency risk but also limits favorable movements.

A mixed approach—hedging part of the investment while leaving some exposure—can balance risk management and profit opportunities.

) Duration Matching

Duration measures a bond’s sensitivity to interest rate changes. By considering the durations of Korean and U.S. bonds together, investors can adjust their portfolio to match investment goals and risk tolerance.

If capital preservation is priority, a portfolio focused on long-term U.S. bonds offers stability. Conversely, mixing in shorter-duration bonds can mitigate interest rate risk.

Cross-country Investment Mix

For example, a balanced portfolio with 50% Korean bonds and 50% U.S. bonds:

• Risk Diversification: Economic downturns in one country can be offset by growth in the other, reducing overall risk.
• Currency Hedging Effect: Holding assets in both won and dollars automatically partially hedges against exchange rate fluctuations.
• Return Optimization: When yield curves differ, increasing allocation to higher-yielding bonds can improve overall returns.

Conclusion: Tailored Strategies for Optimal Returns

Understanding U.S. bonds and engaging with international financial markets is an essential skill for modern investors. U.S. Treasury Bonds combine safety, liquidity, and tax benefits, but it’s crucial to accurately assess risks related to interest rates, inflation, and exchange rates.

Whether you choose direct purchase, funds, or ETFs, consider your investment horizon, risk appetite, and capital size. For Korean investors, strategically blending U.S. and Korean bonds, along with currency hedging and duration matching, can simultaneously enhance portfolio stability and profitability.