Complete Guide to U.S. Treasury Bond Investment: From Understanding to Strategic Deployment in One Step

Unveiling the Safest Asset in the World — U.S. Treasury Bonds

U.S. Treasury Bonds (U.S. Treasuries) are debt certificates issued by the U.S. government, essentially representing a loan from investors to the U.S. government. Compared to other investment tools, U.S. Treasuries enjoy the reputation of being the “world’s safest investment” due to the highest credit rating of the U.S. government. This makes them the preferred safe haven for risk-averse investors and a key asset allocation option for many central banks and institutional investors worldwide.

The popularity of U.S. Treasuries stems from their stable cash flows and excellent liquidity. Regardless of market fluctuations, investors can receive principal and interest payments on time, a certainty that is especially valuable in the complex and volatile financial markets.

How are U.S. Treasuries classified by maturity? How should investors choose?

Based on maturity periods, U.S. Treasuries are divided into four main categories:

Short-term Treasury Bills (T-Bills)

• Maturity: Less than 1 year (typically 4 weeks, 13 weeks, 26 weeks, 52 weeks)
• Issuance: Sold at a discount, no periodic interest payments
• Features: Investors purchase at a discount and receive face value at maturity; the difference is the yield

For example, if a $100 T-Bill is issued at a 1% discount rate, the investor pays $99. Upon maturity, they receive $100. This structure makes short-term T-Bills particularly suitable for short- to medium-term liquidity needs and capital allocation.

Medium-term Treasury Notes (T-Notes)

• Maturity: 2 to 10 years
• Interest Payments: Semiannual interest
• Market Significance: Currently the most widely traded type of government debt

Among these, the 10-year U.S. Treasury yield is considered a benchmark for “global asset pricing” and is a key indicator for analyzing bond market trends.

Long-term Treasury Bonds (T-Bonds)

• Maturity: 10 to 30 years (most are issued for 30 years)
• Interest Payments: Semiannual
• Advantages: Despite the long duration, they can be freely traded in the secondary market, with liquidity not limited

Inflation-Protected Securities (TIPS)

• Special Mechanism: Principal linked to inflation, periodically adjusted based on the Consumer Price Index (CPI)
• Operation: Principal increases with inflation, decreases with deflation (but not below the original face value at maturity)
• Suitable for: Hedging against inflation and protecting real purchasing power

Comparison of different types of Treasuries

Generally, long-term bonds have higher yields than short-term bonds. However, in recent years, with the Fed’s rate hike cycle, short-term yields have risen rapidly, sometimes surpassing long-term yields, leading to an inverted yield curve, which reflects market concerns about future economic prospects.

The profound significance of U.S. Treasury yields: Why investors must understand

The significance of U.S. Treasury yields lies in their direct reflection of the real returns on bond investments and are core indicators for assessing investment attractiveness. Investors need to grasp two key concepts:

Current Yield Calculation: Annual interest ÷ Current market price × 100%

This straightforward metric indicates the annualized return an investor can expect when purchasing a bond at the current price.

Yield to Maturity (YTM) This is the actual annualized return an investor will receive if holding the bond until maturity, considering:

• Periodic interest income
• The difference between purchase price and face value (premium or discount)
• The time value of money over the holding period

YTM is dynamic and directly reflects the true investment value of the bond.

Yield Data Sources

Investors do not need to manually calculate complex YTM formulas; they can access real-time data through:

• The daily yield curve published on the official websites of the Federal Reserve and U.S. Department of the Treasury
• Financial platforms like Investing.com, CNBC, WSJ
• Major brokerage trading platforms’ screening tools and data pages

How can Taiwanese investors build a U.S. Treasury bond portfolio?

For Taiwanese investors, there are three main ways to purchase U.S. Treasuries, each with its advantages and disadvantages:

Option 1: Direct Purchase of Bonds

Through overseas brokers or domestic brokers via cross-border agency trading of issued Treasuries (secondary market).

Purchase Process:

1. Open a securities account with a broker
2. Use search tools or filters to select target bonds (by maturity, yield, etc.)
3. Place an order (market or limit)
4. After execution, bonds are credited to the account, interest is received periodically, and bonds can be transferred at any time

Pros and Cons:

• Pros: Flexible trading, high asset allocation autonomy
• Cons: High minimum purchase amount (usually from USD 1,000, roughly 100 bonds), trading fees including commissions and bid-ask spreads, market risk directly borne

Overseas brokers generally offer a wider selection of bonds, faster quotes, and lower transaction costs compared to domestic cross-border agencies.

Option 2: Bond Funds

Bond funds pool investors’ capital to invest in a diversified basket of bonds, reducing risk associated with individual bonds.

Features:

• Low minimum investment (often from USD 100)
• Diversification benefits
• Management fees apply, leading to higher long-term holding costs

Option 3: Bond ETFs (Most suitable for small investors)

Bond ETFs combine the trading convenience of stocks with the diversification of funds, allowing investors to indirectly hold a portfolio of government bonds.

Main Advantages:

• Lower transaction costs than bond funds
• Can be traded freely on brokerage platforms like stocks
• Ideal for small investments and dollar-cost averaging strategies
• Slightly lower yields than direct bond purchases but with lower risk

Popular U.S. Bond ETFs:

• TLT: Long-term (20+ years) Treasury ETF
• IEF: 7-10 year Treasury ETF
• SHY: Short-term (1-3 years) Treasury ETF
• VGSH: Short-term Treasury index ETF
• TIP: Inflation-protected bond ETF
• GOVT: Aggregate U.S. Treasury ETF

Comparison of the three purchase methods

U.S. Treasury issuance schedule and participation mechanisms

U.S. Treasuries are issued via regular auctions, and investors can view upcoming auction schedules on the official Treasury Direct website.

Issuance frequency by maturity:

Short-term T-Bills are issued frequently:

• 4-week and 8-week: weekly Thursday
• 13-week and 26-week: weekly Monday
• 52-week: quarterly

Medium-term T-Notes:

• 2, 3, 5, 7-year issues: monthly
• 10-year issues: in February, May, August, November

Long-term T-Bonds:

• 30-year issues mainly in January, March, April, June, July, September, October, December
• 20-year issues in specific months

Implication for retail investors: The Treasury Direct platform is only open to U.S. residents, so Taiwanese investors mainly rely on secondary market trading. This is why the three aforementioned methods (especially bond ETFs) are more practical for local investors.

Core factors influencing U.S. Treasury prices and yields

A key characteristic of the bond market is: Bond prices and yields move inversely. When bond prices rise, yields fall; when prices fall, yields rise. This inverse relationship stems from fixed cash flows—higher prices mean lower potential returns for new buyers.

Endogenous Factors

Term structure and coupon rates The longer the maturity, the greater the risk (interest rate risk, inflation risk, etc.), so bonds with longer durations are issued at lower prices to compensate for risk premiums. This directly impacts primary market pricing.

External Market Factors

1. Changes in Market Interest Rates Market interest rates are the most direct influence on bond prices. When the central bank raises rates:

• New bonds are issued with higher coupon rates
• Existing bonds with lower coupons become less attractive
• Investors only buy existing bonds at significantly discounted prices
• Result: existing bond prices fall, yields rise

Conversely, when rates fall, existing bonds with higher coupons appreciate, prices rise, and yields decline.

Since the Fed began its rate hike cycle in 2022, market interest rates have surged, causing bond prices to plummet and yields to reach recent highs—an intuitive reflection of the inverse relationship between rates and prices.

2. Economic Outlook U.S. economic performance directly affects risk sentiment:

• During recessions: market rates decline, funds flow into safe assets (like Treasuries), prices rise
• During booms: investors favor risk assets, demand for Treasuries drops, prices fall

3. Inflation Expectations Rising inflation typically worsens the interest rate environment. In high inflation scenarios:

• Fixed interest payments on bonds cannot compensate for loss of purchasing power
• Investors demand higher yields, pushing bond prices down
• Yields increase to reflect the decline in real returns

When inflation expectations decrease, bond prices tend to rise.

4. Supply Changes In the short term, increased issuance of Treasuries raises market supply:

• Moderate increases are manageable
• Excessive issuance leads to oversupply
• Supply-demand imbalance causes bond prices to fall

Comparing U.S. Treasuries with other U.S. assets

Besides traditional bond investments, investors can consider other U.S. asset allocation tools—especially Contracts for Difference (CFDs).

CFDs are innovative financial derivatives that allow investors to profit from price movements without owning the underlying asset. Compared to direct bond investments, CFDs offer:

CFD trading provides experienced investors with more flexible strategies but also involves higher risks. Regardless of the chosen method, understanding the significance and dynamics of U.S. Treasury yields is fundamental to making informed decisions.

Practical Advice

For Taiwanese investors, the most practical way to build a U.S. Treasury bond portfolio is: start with bond ETFs to accumulate experience and capital, then gradually shift to direct bond purchases once the principal reaches a certain size to optimize yield structures. Continuously monitoring Fed policies, economic data, and inflation trends is key to grasping the direction of the Treasury market.