How to generate stable income through government bond investments, from short-term to long-term US Treasury bonds

As the economy becomes more uncertain, investors begin to seek solid assets. U.S. Treasury Bonds are recognized as the most trusted safe-haven assets in global financial markets. Despite low interest rates, many investors choose them due to their high liquidity, which allows for quick cash conversion at any time. In this article, we will cover the core mechanisms of U.S. Treasury Bond investments, including various product options such as U.S. Short-Term Bonds, and outline essential information Korean investors must know.

Let’s start with what bonds are

A bond is a certificate that proves a loan. The borrower promises to repay the principal on a predetermined future date and pays interest regularly in return. The same applies when the government issues treasury bonds to fund national operations. Bondholders receive interest income semi-annually or annually.

The most actively traded product in the bond market is the 10-year bond. This is because trading is mainly for investment purposes rather than holding for the long term.

Understanding the three types of U.S. Treasury Securities

U.S. Treasury securities are classified based on maturity.

U.S. Short-Term Treasury(T-bill) are instruments with less than one year to maturity, offering extremely low risk and high liquidity. Intermediate-term Treasury(T-note) have maturities between 1 and 10 years and carry moderate risk. Long-term Treasury(T-Bond) have long maturities of 10 to 30 years and feature fixed interest payments.

As economic volatility increases, these treasury securities become central to diversified portfolios. U.S. Treasury yields serve as benchmarks indicating the health of the global economy. Notably, the 10-year yield is used as a macroeconomic indicator worldwide.

What it means that interest rates and yields move inversely

In the bond market, the concepts of interest rates and yields are crucial. The (yield) is the expected return on a bond, calculated by dividing the anticipated income by the purchase price. The reason for differences between issuance prices and market prices is that supply and demand fluctuate in real time.

When demand for treasury bonds increases, prices rise and yields fall. Conversely, when selling demand increases, prices drop and yields rise. Therefore, bond yields are the most direct reflection of investor sentiment.

Four key strengths of investing in U.S. Treasury Bonds

1. Highest reliability

Backed by the U.S. government, these bonds carry almost no risk of loss. This is why investors turn to them first during economic crises.

2. Stable income stream

Interest rates are fixed at issuance, and interest is typically paid regularly every six months. They are ideal for investors who need predictable cash flows, such as retirees.

3. Liquidity at any time

U.S. Treasury bonds are actively traded in the bond market, ensuring excellent liquidity. You can sell immediately if needed, without waiting until maturity.

4. Tax advantages

Interest income from treasury bonds is subject to federal income tax but exempt from state and local taxes. This results in a relatively higher after-tax return.

Four risks investors often overlook

( 1. Losses from rising interest rates When interest rates rise, newly issued bonds offer higher yields, causing the value of existing bonds to decline. Selling before maturity may result in losses.

) 2. Erosion by inflation Fixed interest rates may not keep pace with inflation. If inflation exceeds bond yields, real purchasing power decreases. While inflation-linked bonds###TIPS### are designed to address this, regular bonds are not.

( 3. Currency exchange risk For foreign investors, fluctuations in exchange rates impact actual returns. A weakening dollar reduces both interest income and principal when converted to the local currency.

) 4. Possibility of government credit deterioration While the risk of the U.S. defaulting is extremely low, it is theoretically possible during political or economic crises. However, given the high credit rating of the U.S., the actual risk is minimal.

Comparing three ways to buy U.S. Treasury Bonds

1. Direct purchase

Buy directly from the U.S. Treasury via the TreasuryDirect website or through securities firms’ distribution markets.

Advantages: Full control over buying and selling decisions, no fund management fees. Holding until maturity guarantees regular interest payments and full principal repayment.

Disadvantages: Personal investment limit is $10,000. Managing a diversified portfolio requires significant capital and effort. Selling after interest rate increases may incur losses.

Suitable investors: Conservative investors seeking stable income with long-term holding, retirees relying on regular interest for living expenses, investors who want to manage their portfolio directly.

2. Bond funds

Managed by professional fund managers who pool funds from multiple investors to create and manage diversified treasury bond portfolios.

Advantages: Diversification reduces individual bond risk. Active management adjusts the portfolio according to market conditions. Small investments can access a wide range of bonds.

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

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

3. Bond ETFs

Exchange-traded funds that track U.S. Treasury bond indices, traded on stock exchanges like stocks.

Advantages: Passive management with lower fees than active funds. Traded like stocks, offering high liquidity and flexibility.

Disadvantages: Subject to stock market volatility. Tracking errors due to fees and trading costs. Cannot respond actively to rapid market changes.

Suitable investors: Investors seeking low-cost treasury exposure, those preferring direct investment over fund managers, passive investors trusting market efficiency.

Strategic portfolio construction for Korean investors

Proper allocation with domestic bonds is essential

Holding both Korean and U.S. treasury bonds can create a more resilient portfolio.

Diversification benefits: Reduces the impact of economic downturns in a single country on the entire portfolio. Low probability of simultaneous political instability, interest rate swings, and recessions across countries.

Currency hedging opportunities: Holding both KRW and USD can mitigate exchange rate risks. When the won weakens, the value of U.S. bonds in KRW rises; when the won strengthens, domestic bonds serve as a hedge.

Optimizing returns: Utilize yield curves from both countries. For example, if Korean bonds offer higher yields for similar maturities, you can maintain a core position in U.S. bonds while increasing Korean bond holdings.

Managing exchange rate risk

Korean investors are primarily concerned with currency risk. Fluctuations in the dollar exchange rate directly affect final returns.

Hedging via derivatives like forward contracts can lock in exchange rates. However, this also limits gains from favorable currency movements.

A practical approach is partial hedging—hedging only 50% of U.S. bond investments while leaving the rest exposed. This balances currency risk and potential gains. During periods of dollar strength, unhedged portions can generate additional returns.

Using duration strategies

Duration measures a bond’s sensitivity to interest rate changes and indicates the average time to recover principal.

If capital preservation is the priority, construct a portfolio with long-maturity U.S. bonds. To reduce interest rate sensitivity, include shorter-duration products like short-term U.S. Treasury bonds.

Tax considerations

Interest from U.S. treasury bonds is subject to U.S. federal tax but may also be taxed in Korea. Fortunately, the U.S.-Korea Double Taxation Agreement###DTA### prevents double taxation of the same income. Consulting a tax professional before investing is recommended.

Practical portfolio example

Suppose a balanced portfolio with 50% Korean bonds and 50% U.S. bonds. This aims to balance principal preservation and regular income.

This composition reduces dependence on a single country’s economy. The portfolio value in KRW fluctuates with exchange rates.

If 50% of U.S. bonds are hedged, the hedged portion acts as insurance during dollar weakness, absorbing currency losses. Conversely, during dollar strength, the unhedged 50% can generate additional gains from exchange rate movements.

Conclusion: Enhancing stability through multi-layered bond investments

Investing in U.S. Treasury Bonds is a robust asset allocation method for both individuals and institutions. Understanding risks such as interest rates, inflation, and exchange rates is essential for sustained long-term returns.

Korean investors should consider building a diversified portfolio with various maturities—from short-term to long-term—by combining U.S. and domestic bonds. Choosing the appropriate method—direct purchase, funds, or ETFs—based on personal circumstances and investment preferences can help establish a stable asset base even amid economic uncertainties.