Understanding U.S. Treasury Yields: What Investors Must Know

As the global financial markets change rapidly, investors are looking for one thing: “stability.” As economic uncertainty increases, many asset managers turn their attention to a particular option: U.S. Treasury Bonds. Based on the creditworthiness of the U.S. government, this product is well-known for its low risk and ease of liquidity, making it highly liquid. Especially, understanding the movement of U.S. Treasury yields is the first step in grasping the global economic flow. This article covers everything from the basics of bond investing, how to purchase them in practice, and strategies that Korean investors must consider.

The Essence of Bonds: The Journey of Money

Bonds are simple. An investor provides funds to a debtor and receives the principal back on a predetermined date. During this process, the debtor pays regular interest as compensation for the borrowed amount. Typically, this occurs in 6-month or 1-year intervals.

The government operates similarly. When it lacks funds needed for fiscal management, it issues government bonds to borrow money from individuals and institutions, paying interest in return. The most actively traded product in the global bond market is the 10-year U.S. Treasury note, which serves as a benchmark among medium-term investors.

Types and Characteristics of U.S. Treasury Securities

The U.S. Department of the Treasury issues three types of bonds based on maturity.

T-bills(Short-term securities) have maturities of less than one year, with almost no risk and excellent liquidity. T-notes(Medium-term securities) cover maturities from 1 to 10 years, preferred by investors seeking medium-term returns. T-bonds(Long-term securities) offer long maturities of 10 to 30 years with a fixed interest rate structure.

During periods of high economic volatility, these stable government bonds become core assets for portfolio rebalancing. U.S. Treasury yields serve as a benchmark for the entire financial market and are key indicators of global economic health.

Understanding the Inverse Relationship Between Interest Rates and Yields

To interpret U.S. Treasury yields, one must understand a fundamental principle: the inverse movement between bond prices and interest rates.

Yield is calculated by dividing the expected return at the time of purchase by the purchase price. The market price of bonds fluctuates in real-time, differing from the issuance price, depending on supply and demand.

When demand for safe assets like government bonds increases, prices rise, and U.S. Treasury yields fall. Conversely, if demand decreases, prices drop and yields rise. This phenomenon accurately reflects investor sentiment and risk appetite in the market.

Looking at the maturity structure, longer maturities generally imply higher yields due to greater uncertainty. However, during fears of recession, long-term bond demand can surge, causing long-term yields to fall below short-term yields—a phenomenon called an inverted yield curve, often signaling economic slowdown.

Four Practical Benefits of Investing in U.S. Treasury Bonds

1. Virtually No Repayment Risk

The U.S. government guarantees principal and interest repayment, making default risk extremely low. During recessions, many institutional investors shift assets into U.S. Treasuries precisely for this safety.

2. Fixed Return Structure

Interest rates are fixed at issuance, typically paid semi-annually, providing predictable income—ideal for retirees or investors needing stable cash flow.

(# 3. Excellent Liquidity U.S. Treasury securities are actively traded throughout the day. You can hold until maturity or sell quickly if needed, enhancing portfolio flexibility.

)# 4. Tax Benefits Interest income from U.S. Treasuries is subject to federal income tax but exempt from state and local taxes. This can result in a higher after-tax yield compared to other bonds.

Four Risks Faced When Investing in U.S. Treasury Bonds

1. Interest Rate Risk

If U.S. Treasury yields rise after purchase, newly issued bonds will offer higher returns, making existing bonds less attractive and causing their prices to fall. Selling before maturity in such a scenario may lead to losses.

2. Inflation Risk and Real Value Erosion

Bonds pay fixed interest, which may not keep pace with rising inflation. If inflation exceeds bond yields, real purchasing power declines. While inflation-linked bonds(TIPS) are designed to hedge against this, regular government bonds are not.

3. Currency Exchange Risk

For foreign investors, exchange rates are crucial. A weakening dollar reduces the value of interest and principal when converted to local currency. For example, earning 4% interest over a year can result in a net loss if the dollar depreciates by 5%.

4. Credit Risk (Theoretical Level)

While the likelihood of the U.S. government defaulting is extremely low, it cannot be entirely excluded. Historically, the U.S. has fulfilled its debt obligations faithfully, and its credit rating remains at the highest level, making this risk practically negligible.

Three Practical Ways to Purchase U.S. Treasury Securities

Approach varies depending on investment goals and risk appetite.

1. Direct Purchase

You can buy directly from the U.S. government or through securities firms in the secondary market. Using the TreasuryDirect website, individuals can trade directly.

Advantages: Owning individual bonds gives you control, and unlike mutual funds or ETFs, management fees are absent. Holding to maturity ensures regular interest payments and full principal repayment.

Disadvantages: Personal purchase limit is $10,000. To diversify, you need to buy multiple bonds, requiring significant capital and management effort. Selling before maturity in a rising rate environment may require selling at a discount.

Suitable for: Conservative investors seeking stable long-term investment, retirees needing predictable income, investors wanting direct portfolio management.

2. Bond Funds

Mutual funds pool investors’ money to manage a diversified portfolio of bonds, professionally managed according to market conditions.

Advantages: Diversification reduces risk of individual bonds. Active management responds to market changes. Access to various bond types with small capital.

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

Suitable for: Investors seeking professional management, those avoiding the hassle of individual bond management, risk-averse investors aiming for stable long-term income.

(# 3. Bond ETFs)Exchange-Traded Funds### Passive funds that track specific bond indices, e.g., U.S. Treasury bond indices. Traded on stock exchanges like stocks.

Advantages: Low-cost passive management. High liquidity and trading flexibility. Transparent index tracking with predictable performance.

Disadvantages: Market volatility can affect prices even if underlying bonds are stable. Tracking error may cause slight performance deviations from the index. No active management, only passive.

Suitable for: Investors wanting low fees, those who prefer direct trading and trust market efficiency, index followers.

Combining Korean and U.S. Treasury Strategies

Holding both Korean and U.S. bonds can elevate your portfolio.

Key Benefits of Combined Investment

Regional Diversification Holding bonds from both countries reduces exposure to specific economic risks. A recession in one country may be offset by growth in the other. Holding KRW and USD assets also partially hedges against exchange rate fluctuations.

Optimizing Returns Different yield curves create opportunities. For example, if Korean bonds offer higher yields at the same maturity, you can maintain U.S. Treasuries for stability while increasing Korean bond holdings to boost returns. Arbitrage strategies exploiting international interest rate differentials are also possible.

Practical Strategies for Korean Investors

Managing Currency Risk For Korean investors, U.S. Treasury yields are important, but exchange rates matter equally. A weak dollar reduces the KRW value of interest and principal. Forward contracts(forward contract) can lock in exchange rates, though they limit profit opportunities.

A balanced approach involves partially hedging currency risk—hedging some portion while leaving some unhedged to benefit from potential currency appreciation.

Bond Duration Strategies Duration measures sensitivity of bond prices to interest rate changes. For principal preservation, a portfolio of long-term U.S. Treasuries offers stability. To reduce interest rate risk, mixing in shorter-duration bonds is advisable.

Tax Optimization Interest from U.S. Treasuries is taxed by the U.S. federal government and also taxed in Korea. Fortunately, the Korea-U.S. Double Taxation Agreement(DTA) prevents double taxation on the same income. Consulting a tax professional is recommended.

( Real Portfolio Example

Suppose a balanced portfolio with 50% Korean bonds and 50% U.S. Treasuries. This setup aims for principal preservation and regular income.

Reducing dependence on a single economy mitigates risk. Applying currency hedging to half of U.S. bonds can control exchange rate risk.

In times of a strong dollar, unhedged U.S. bonds can yield higher returns in KRW terms. Conversely, during a weak dollar, hedged portions offset currency losses.

Conclusion: Securing Stability Through Rational Choices

U.S. Treasury Bonds are a proven safe asset for both individuals and institutions. However, understanding the volatility of U.S. Treasury yields, inflation, and exchange rate risks is essential to protect returns.

For Korean investors, combining U.S. Treasury bonds with Korean bonds can achieve diversification and income stability. Choosing the right method—direct purchase, funds, or ETFs—based on your investment horizon, risk profile, and asset size is key to success.

A solid foundational investment strategy in complex financial markets is the cornerstone of long-term wealth accumulation.