How to Buy U.S. Treasury Bonds: Understanding Interest Rates and Investment Strategies

In times of economic downturn, many investors are paying close attention to stable asset allocation. In this context, U.S. Treasury bonds are recognized as the most reliable safe assets in the global financial markets. To accurately understand how to buy U.S. Treasury bonds and build a solid investment foundation, you first need to grasp the core concepts of bond investing.

The First Step in U.S. Treasury Bond Investing: Understanding Basic Concepts

A bond is essentially a loan certificate. When an investor provides funds to the government or a corporation, the borrower promises to repay the principal on a predetermined maturity date and pay regular interest. This promise is the core value of a bond.

The U.S. government issues Treasury bonds to raise funds necessary for national operations. Unlike corporate bonds, U.S. government bonds are backed by the full faith and credit of the U.S. government, making the risk of default extremely low. This is why U.S. Treasury bonds are used as benchmark rates (benchmark yields) in international finance.

Especially, the 10-year U.S. Treasury note functions as an important indicator of the macroeconomic health of the global economy. It is also one of the most actively traded products in the bond market.

The yield of a bond does not simply mean the interest rate. Yield refers to the expected return relative to the purchase price of the bond and fluctuates in real-time with market changes. Remember that bond prices and yields always move in opposite directions.

For example, if demand for U.S. Treasury bonds increases, prices go up and yields fall. Conversely, if demand decreases, prices fall and yields rise. This inverse relationship is a crucial mechanism in bond investing.

Comparing the Three Main Ways to Purchase U.S. Treasury Bonds

The methods to buy U.S. Treasury bonds can be divided into three categories based on investment goals and risk preferences. Understanding each method’s characteristics and choosing the right one for your situation is essential.

Method 1: Direct Purchase for Personal Ownership

You can buy bonds directly from the U.S. Department of the Treasury via the TreasuryDirect website or purchase existing bonds on the secondary market through brokerage firms.

Main Advantages:

• Full control over the bonds you own
• No management fees unlike mutual funds or ETFs
• Holding to maturity guarantees regular interest payments and full principal repayment

Main Disadvantages:

• Maximum purchase limit of $10,000 per individual
• To diversify your portfolio, you need to buy multiple bonds, requiring sufficient capital
• If interest rates rise and you need to sell early, you may have to sell at a discount

Suitable Investors: Conservative investors planning to hold long-term for stable income, such as retirees or individuals managing their own portfolios.

Method 2: Managed via Bond Funds

Investors pool funds into mutual funds that hold diversified bond portfolios managed by professional fund managers.

Main Advantages:

• Diversification reduces risks associated with individual bonds
• Active management adjusts portfolios according to market changes
• Allows diversification with smaller capital

Main Disadvantages:

• Management fees can reduce overall returns
• No direct control over individual bond selections

Suitable Investors: Those seeking professional management, diversification, and long-term stable income, and who prefer a risk-averse approach.

Method 3: Using Bond Index Funds (ETFs)

Passive exchange-traded funds that track specific bond indices, managed transparently and with low fees.

Main Advantages:

• Lower fees due to passive management
• High liquidity, tradable like stocks on exchanges
• Transparent index tracking ensures predictable portfolio composition

Main Disadvantages:

• Price can fluctuate with market volatility
• Trading costs and tracking errors may cause slight deviations from the index
• No active optimization based on market conditions

Suitable Investors: Investors who prefer passive, low-cost exposure to U.S. Treasury bonds, trusting market efficiency, and who want to avoid active management.

Types and Characteristics of U.S. Treasury Bonds

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

• T-Bills: Short-term securities with maturities under 1 year, offering minimal risk and high liquidity.
• T-Notes: Medium-term securities with maturities from 1 to 10 years, balancing yield and liquidity.
• T-Bonds: Long-term securities with maturities from 10 to 30 years, paying fixed interest and suitable for long-term asset allocation.

During economic recessions, bonds become a core component of diversified portfolios due to their stability. U.S. Treasury yields also serve as benchmarks for the risk-free rate in financial markets.

Generally, longer maturities imply greater uncertainty about the future, so long-term bond yields should be higher than short-term yields. However, during fears of economic downturns, investors tend to prefer long-term bonds, causing long-term yields to fall below short-term yields—a phenomenon known as an inverted yield curve, often signaling a recession.

Risk and Return: Analyzing the Risks of U.S. Treasury Bonds

While U.S. Treasury bonds are considered safe assets, they are still subject to certain risks:

Interest Rate Risk

When you buy bonds, if interest rates rise afterward, new bonds are issued at higher rates, making existing bonds less attractive and causing their market prices to fall. If you sell before maturity, you may incur losses and have to sell at a discount.

Inflation Risk

Fixed-rate bonds may not keep pace with rising inflation, eroding real purchasing power. If inflation exceeds the bond’s yield, the real return becomes negative. Treasury Inflation-Protected Securities (TIPS) hedge against this risk, but regular U.S. Treasury bonds do not.

Currency Risk

For foreign investors, exchange rate fluctuations are significant. For example, Korean investors holding dollar-denominated bonds face a decrease in principal and interest value if the won appreciates against the dollar. Conversely, a weakening dollar can generate gains.

Credit Risk

Theoretically, the U.S. government could default. However, the U.S. is considered the most reliable issuer, with a long history of meeting debt obligations. Political or economic instability could increase risk, but the U.S. maintains the highest credit rating, making default highly unlikely.

Investment Guide for Korean Investors in U.S. Treasury Bonds

Korean investors should consider additional factors beyond general risks:

1. Currency Hedging Strategies

Exchange rate fluctuations are a primary concern. Using derivatives like forward contracts can lock in exchange rates. Hedging reduces currency risk but incurs costs. A practical approach is to hedge only part of the investment—for example, hedge 50% of the amount and leave the rest exposed—allowing you to benefit from favorable currency movements while reducing overall risk.

2. Duration Matching

Duration measures a bond’s sensitivity to interest rate changes, representing the average time until principal is recovered. Korean investors should consider matching durations of Korean and U.S. bonds to align with their risk appetite and investment horizon. Longer durations provide more predictable income but are more sensitive to rate changes; shorter durations reduce sensitivity.

3. Understanding International Tax Treaties

U.S. interest income is subject to federal withholding tax. Korea also taxes foreign income, but the Korea-U.S. Double Taxation Agreement (DTA) prevents double taxation. Consulting a tax professional ensures proper tax planning and compliance.

Portfolio Construction and Strategies Using U.S. Treasury Bonds

Combining Korean and U.S. bonds can optimize portfolio performance:

Diversification Benefits

Holding bonds from both countries diversifies geographic and currency risks. It reduces exposure to country-specific economic or political shocks.

Holding both Korean won and dollar-denominated bonds can offset currency risks. When the won weakens, the dollar-denominated bonds’ value in won terms rises; when the won strengthens, Korean bonds provide stability.

Since economic cycles differ between Korea and the U.S., downturns in one economy may be offset by strength in the other, enhancing overall portfolio stability.

Yield Optimization Strategies

Investors can leverage yield curves in both countries. If Korean bonds offer higher yields at similar maturities, increasing U.S. bond holdings as a safe core can boost returns.

Interest rate differentials create carry trade opportunities: borrowing in low-interest currencies and investing in higher-yield assets can generate additional income.

Example Portfolio

A balanced portfolio with 50% Korean government bonds and 50% U.S. Treasury bonds can provide a mix of safety and income. Hedging half of the U.S. bond exposure against currency fluctuations can further optimize returns—benefiting from dollar strength while mitigating downside risk during dollar weakness.

Conclusion

Understanding how to buy U.S. Treasury bonds accurately is the starting point for stable asset allocation. They are vital tools for both individual and institutional investors to manage interest rate, inflation, and currency risks while earning reliable returns.

For Korean investors, combining U.S. bonds with domestic bonds offers diversification and enhanced stability. Choosing among direct purchases, bond funds, or ETFs should align with your investment goals, risk tolerance, and capital. Incorporating strategies like currency hedging, duration management, and tax planning tailored to your circumstances is essential.

With systematic planning and ongoing portfolio review, you can maximize both the profitability and safety of your U.S. Treasury bond investments.