How to Buy U.S. Treasury Bonds: A Beginner-Friendly Guide to Getting Started

Investors seeking safe assets amid uncertain markets are increasing. In particular, U.S. Treasury bonds are considered the safest investment vehicle based on the U.S. government’s creditworthiness. Learning how to buy U.S. Treasury bonds—despite low interest rates—can upgrade your investment portfolio to the next level. In this article, we’ll cover everything from the basics of U.S. Treasuries to actual purchasing methods and tailored strategies for Korean investors.

Starting with the Basics of Treasury Bonds and Bonds

To understand Treasuries, you first need to know what bonds are. Simply put, bonds are certificates of debt—promises to repay borrowed money. The issuer (debtor) promises to return the principal at maturity and pays periodic interest in the meantime.

When a government needs funds for operations, it issues Treasury bonds. It borrows money from individuals or institutions and pays interest—this is what Treasury bonds are. Especially, U.S. Treasury bonds issued by the U.S. government are among the most actively traded safe assets worldwide.

The most traded product in the Treasury market is the 10-year U.S. Treasury note. These 10-year bonds are mainly bought and sold for investment purposes rather than for holding to maturity, providing insights into market interest rate expectations and economic outlooks.

Characteristics and Selection of the 3 Types of U.S. Treasuries

The U.S. Department of the Treasury issues three types of bonds based on maturity. Knowing their features helps decide how to buy Treasuries.

T-bill (Treasury Bill): Short-term bonds with less than 1-year maturity, virtually risk-free, and highly liquid. Suitable for safely managing short-term funds.

T-note (Treasury Note): Medium-term bonds with maturities between 1 and 10 years. They have characteristics between short- and long-term bonds, used for balanced investing.

T-bond (Treasury Bond): Long-term bonds with maturities from 10 to 30 years. Offer fixed interest rates, suitable for investors seeking stable income over the long term.

Economic conditions influence investment strategies. During recessions, safe Treasuries are key to diversified portfolios; during booms, increasing short-term holdings in anticipation of rising interest rates is common.

Understanding the Relationship Between Interest Rates and Yields

Investors must understand the inverse relationship between interest rates and yields. Bond prices fluctuate in real-time with market conditions.

When demand for Treasuries increases, prices go up, and yields (interest rates) go down. Conversely, when demand drops, prices fall, and yields rise. Bond prices and yields move in opposite directions.

U.S. Treasury bonds serve as important benchmarks in financial markets. The 10-year Treasury yield, in particular, is a global economic indicator and influences various interest rates. Generally, longer maturities carry higher yields due to increased uncertainty, but during recession fears, long-term yields can fall sharply as demand surges.

4 Major Advantages and Risks of Treasury Investment—And How to Respond

Before investing in Treasuries, it’s essential to weigh their advantages against potential risks.

4 Reasons Why Treasury Bonds Are Attractive

1. Backed by the U.S. Government

U.S. Treasuries are considered the safest because the U.S. government guarantees repayment. During economic downturns, many investors flock to these virtually risk-free assets.

2. Fixed Interest Income

Interest rates are set at issuance, with payments typically made semiannually. Regular cash flows make Treasuries ideal for retirees or those seeking stable income.

3. High Liquidity and Easy Cash Conversion

U.S. Treasuries are the most actively traded assets in the bond market. You can hold to maturity or sell anytime, facilitating portfolio adjustments.

4. Tax Benefits

Interest income from U.S. Treasuries is subject to federal income tax but exempt from state and local taxes, enhancing after-tax returns.

4 Risks and How to Manage Them

1. Rising Interest Rates Reduce Bond Prices

When market rates rise after purchase, existing bonds with lower rates become less attractive, causing their prices to fall. Selling before maturity can lead to losses. To mitigate, hold bonds to maturity or buy during periods of low rate volatility.

2. Inflation Erodes Real Returns

Fixed-rate bonds lose purchasing power if inflation exceeds the coupon rate. For example, a 3% yield with 5% inflation results in a -2% real return. Inflation-linked bonds (TIPS) protect against this risk, but standard Treasuries do not.

3. Currency Exchange Risk

For Korean investors, exchange rate fluctuations impact returns when converting USD to KRW. A weakening dollar reduces the KRW value of dollar-denominated assets, while a strong dollar boosts returns.

4. Credit Risk Is Very Low

While theoretically possible, the risk of the U.S. government defaulting is extremely low. The U.S. has a long history of fulfilling debt obligations, making its Treasuries highly reliable.

How to Buy Treasuries: 3 Methods and Which Suits You

There are three main ways to purchase U.S. Treasuries. Choose based on your investment goals and preferences.

Method 1: Direct Purchase—For Investors Who Want Full Control

Features Buy directly from the U.S. Treasury via TreasuryDirect or through securities firms in the secondary market.

Advantages

• Full control over investment decisions
• No management fees unlike mutual funds or ETFs
• Receive regular interest and full principal at maturity

Disadvantages

• TreasuryDirect limit of $10,000 per person per year
• Managing multiple bonds can be cumbersome
• Selling before maturity may incur losses if rates rise

Suitable For Conservative investors, retirees seeking stability, those wanting direct management

Method 2: Bond Funds—For Those Preferring Professional Management

Features Invest in mutual funds that pool investor money to buy a diversified portfolio of U.S. Treasuries managed by professional fund managers.

Advantages

• Diversification reduces risk of individual bonds
• Active management adapts to market conditions
• Low minimum investment, broad access

Disadvantages

• Management fees reduce net returns
• No direct control over individual bonds
• Performance depends on fund manager’s skill

Suitable For Investors seeking professional management, risk-averse investors, those avoiding direct bond management

Method 3: ETFs (Exchange-Traded Funds)—For Cost-Effective, Flexible Investing

Features Track U.S. Treasury bond indices; traded on stock exchanges like stocks.

Advantages

• Low-cost passive management
• Highly liquid and tradable throughout trading hours
• Transparent holdings

Disadvantages

• Subject to stock market volatility
• Trading costs and tracking errors may occur
• No active management, less flexibility in adjusting to market shifts

Suitable For Cost-conscious investors, those preferring passive investing, investors trusting market efficiency

Tailored Strategies and Portfolio Construction for Korean Investors

Korean investors should consider additional factors like currency risk, taxes, and asset allocation when investing in U.S. Treasuries.

Diversification Between Korean and U.S. Treasuries

Combining both can enhance portfolio stability. Since economic cycles differ, when Korea weakens, the U.S. economy might be strong, and vice versa. Holding assets in both won and dollars naturally hedges against currency risk.

Managing Currency Risk

Currency fluctuations significantly impact returns. Using hedging instruments like forward contracts can lock in exchange rates, reducing risk but potentially missing favorable moves. A balanced approach might hedge 50% of the exposure, leaving the rest open to currency movements—currently, a non-hedged position may yield higher returns amid a strong dollar environment.

Duration Matching

Duration measures sensitivity to interest rate changes. Longer durations increase risk; shorter durations reduce it. Matching the duration of your bonds to your investment horizon helps manage interest rate risk effectively.

Tax Optimization

U.S. interest is subject to federal tax; Korea also taxes worldwide income. However, the U.S.-Korea tax treaty prevents double taxation. Consulting a tax professional ensures compliance and optimal tax treatment.

Checklist Before Starting Your First Treasury Investment

Preparation Steps

1. Define Your Goals

• What is your primary goal? (Income stability, long-term growth, inflation hedge)
• How long do you plan to invest?
• What annual return do you need?

2. Assess Your Risk Tolerance

• How much risk can you handle?
• How will you respond to market volatility?
• Do you prefer managing investments yourself or via professionals?

3. Choose Your Investment Method

• Direct purchase, funds, or ETFs?
• Domestic or international brokerage accounts?

4. Build Your Portfolio

• What proportion of Korean vs. U.S. Treasuries?
• Short-, medium-, or long-term bonds?
• Will you hedge currency risk or not?

5. Understand Taxes and Costs

• What taxes apply?
• Trading and management fees?
• Reporting obligations as a resident in Korea?

Post-Investment Management Tips

• Review your portfolio periodically (quarterly), but avoid reacting to short-term fluctuations.
• Keep informed about interest rate trends and economic news.
• Adjust your holdings as your financial situation changes.
• Keep thorough records for tax purposes.

Conclusion

U.S. Treasuries are trusted safe assets worldwide. Despite low interest rates, they offer fixed income, high liquidity, and safety—making them a vital component of diversified portfolios.

Understanding various purchasing methods and selecting strategies aligned with your goals are key to successful investing. For Korean investors, paying attention to currency risk, taxes, and asset allocation—while combining U.S. and Korean bonds—can optimize both returns and stability. With systematic planning and ongoing monitoring, you can realize the true value of investing in U.S. Treasuries.