Complete Guide to U.S. Bond Investment: Achieving Stable Income with Treasury Bonds

In today’s rapidly changing economy, many investors are seeking stable asset management methods. U.S. bonds, especially Treasury securities, are regarded as the most trusted safe assets in global financial markets. Treasury bonds guaranteed by the U.S. government are popular among both individual and institutional investors due to their regular interest income and principal security.

What Are Treasury Bonds? Basic Concepts and English Terms for U.S. Treasury Securities

You need to understand the fundamentals of bonds first. Bonds are financial products where investors lend money to borrowers and receive regular interest payments and the principal at maturity. The U.S. government issues these bonds to fund national operations.

Treasury bonds (U.S. Treasury securities) are debt securities issued by the U.S. Department of the Treasury. The most actively traded in the bond market is the 10-year Treasury note, which serves as a benchmark for global interest rates and a macroeconomic health indicator.

It’s important to understand the relationship between interest rates and yields. In the bond market, interest rates and bond prices move inversely. When interest rates rise, yields on new bonds increase, causing existing bond prices to fall. Conversely, when rates fall, existing bond prices rise. Understanding this helps in timing and strategizing investments.

Differences Between Treasury Bill, Note, and Bond: Maturity-Based Strategies

U.S. Treasury securities are classified into three types based on maturity:

Treasury Bill (T-Bill) – Short-term Security
Matures within one year. It carries minimal risk and high liquidity, making it suitable for investors needing stable cash management. Often used for short-term cash holdings.

Treasury Note (T-Note) – Medium-term Security
Matures between 1 and 10 years. Popular among investors seeking moderate-term returns. Offers a balance of risk and yield between short and long-term securities.

Treasury Bond (T-Bond) – Long-term Security
Matures over 10 to 30 years. Provides fixed interest rates, making it ideal for retirees or conservative investors seeking long-term stability.

During economic downturns, stable Treasury securities become core components of diversified portfolios. Observing the yield curves of each bond type can reveal current economic conditions. Typically, long-term bonds should offer higher yields than short-term ones, but during recessions, demand for long-term bonds can surge, sometimes causing an inverted yield curve where short-term yields exceed long-term yields.

Four Key Income Opportunities in U.S. Bond Investment

1. Superior Safety and Trustworthiness

Treasury bonds are considered the safest investments globally because they are backed by the U.S. government. During recessions, many funds flock to Treasury securities due to their virtually no default risk. The U.S. has a long history of fulfilling its debt obligations, maintaining a top credit rating.

2. Predictable Regular Income

They carry fixed interest rates established at issuance, typically paid semiannually. This predictable cash flow is ideal for retirees or income-focused investors. Holding bonds to maturity ensures regular interest payments and full principal repayment.

3. Excellent Liquidity

The Treasury bond market has the highest daily trading volume among bonds, allowing easy buying and selling at any time. This high liquidity provides portfolio flexibility, enabling investors to sell bonds whenever needed without waiting for maturity.

4. Tax Efficiency

Interest income from Treasury bonds is subject to federal income tax but exempt from state and local taxes. This tax advantage can lead to higher after-tax returns compared to other investments, especially beneficial for investors in high-tax regions.

Essential Investment Risks: Interest Rate, Inflation, Exchange Rate, and Credit Risks

While Treasury bonds are safe assets, investors must be aware of four main risks:

1. Interest Rate Risk

When interest rates rise, new Treasury bonds are issued at higher yields, causing existing bond prices to fall. Selling bonds before maturity in a rising rate environment can lead to losses. This risk is more pronounced with long-term bonds.

2. Inflation Risk

Fixed-rate Treasury bonds can lose purchasing power if inflation exceeds the bond’s yield. For example, holding a bond with a 3% yield during 5% inflation results in negative real returns. Treasury Inflation-Protected Securities (TIPS) are designed to mitigate this risk.

3. Currency Risk

For foreign investors, especially in Korea, exchange rate fluctuations are critical. A weakening dollar reduces the value of interest and principal when converted back to local currency. Conversely, a strong dollar can generate currency gains.

4. Credit Risk

Theoretically, there’s a risk that the U.S. government might default. However, the U.S. maintains the highest credit rating and has historically honored its debt obligations, making this risk extremely low.

Three Ways to Invest in U.S. Bonds: From Direct Purchase to ETFs

1. Direct Purchase of Individual Bonds

Investors can buy Treasury securities directly via TreasuryDirect (www.treasurydirect.gov) or through brokerage firms in the secondary market.

Advantages:

• Full control over individual bonds
• No management fees like mutual funds or ETFs
• Full principal repayment and regular interest if held to maturity

Disadvantages:

• Purchase limit of $10,000 per individual via TreasuryDirect
• Diversification requires significant capital and management effort
• Selling before maturity in a rising rate environment may incur losses

Suitable for:

• Retirees seeking stable, long-term income
• Conservative investors needing predictable cash flow
• Investors preferring direct portfolio management

2. Bond Funds Managed by Professionals

Bond mutual funds pool investors’ money to buy a diversified portfolio of Treasury securities managed by professional fund managers.

Advantages:

• Access to diversified holdings with smaller capital
• Active management adapts to market conditions
• Better diversification than individual bonds

Disadvantages:

• Management fees reduce net returns
• No direct control over individual bonds
• Performance depends on fund management

Suitable for:

• Investors seeking professional management and diversification
• Those wanting to reduce management burden
• Risk-averse investors prioritizing stable, long-term returns

3. ETFs Tracking Treasury Bond Indices

Exchange-Traded Funds (ETFs) that track Treasury bond indices can be bought and sold like stocks.

Advantages:

• Lower management fees than mutual funds
• High liquidity and flexibility
• Transparent holdings

Disadvantages:

• Lack of active management limits responsiveness
• Market volatility affects ETF prices
• Slight tracking errors may occur

Suitable for:

• Investors seeking low-cost Treasury exposure
• Those preferring independent, index-based investing
• Investors trusting market efficiency and index tracking

Smart Strategies for Korean Investors: Duration, Hedging, and Tax Optimization

1. Managing Currency Risk: Hedging Strategies

A major concern for Korean investors is exchange rate risk. Fluctuations in the dollar affect returns when converted to won.

Currency Hedging: Using derivatives like forward contracts to lock in exchange rates and eliminate currency risk.

Partial Hedging: Hedging only part of the investment (e.g., 50%) balances risk reduction with potential gains from dollar strength. For example, hedging 50% of the portfolio can reduce currency risk while still capturing upside if the dollar appreciates.

Given the current environment where the dollar is relatively strong, partial hedging is an effective approach to balance risk and reward.

2. Duration Matching: Aligning with Investment Goals and Risks

Duration measures a bond’s sensitivity to interest rate changes. Longer durations mean higher sensitivity.

For Stable Income: Use long-term Treasury bonds (over 10 years) for predictable, stable returns.

To Minimize Risk: Incorporate shorter-duration bonds (1-3 years) to reduce losses during rate hikes.

Adjusting the portfolio’s duration based on your risk appetite and market outlook helps optimize returns and control risks.

3. Tax Optimization: Avoiding Double Taxation

Interest from U.S. Treasury bonds is taxable at the federal level but exempt from Korean taxes. However, Korea may tax foreign income, so understanding the Double Taxation Agreement (DTA) between Korea and the U.S. is crucial.

Consult tax professionals to develop strategies that minimize tax burdens and maximize after-tax returns.

4. Combining Korean and U.S. Bonds Strategically

A balanced portfolio with 50% Korean government bonds and 50% U.S. Treasury securities can diversify risks across economies and currencies.

Benefits:

• Reduces exposure to a single country’s economic risks
• Currency movements can offset losses in one market with gains in another
• Optimizes yields by adjusting allocations based on market conditions

For example, if the won weakens against the dollar, U.S. bonds’ value in won terms increases, while Korean bonds may experience currency losses, balancing overall returns.

Conclusion: Achieving Long-term Asset Preservation and Income with Treasury Bonds

U.S. Treasury securities are proven, stable investment options suitable for both individuals and institutions. With a variety of maturities, investors can tailor their portfolios to meet specific goals and risk tolerances.

Understanding and managing risks such as interest rate fluctuations, inflation, currency movements, and credit is essential. For Korean investors, employing hedging, duration management, and tax strategies can significantly enhance investment efficiency.

Choosing the right approach—whether direct purchase, bond funds, or ETFs—and combining U.S. and Korean bonds in a diversified portfolio can lead to stable long-term growth. Clear investment goals, professional advice, and regular portfolio review are key principles for successful Treasury bond investing.