A Guide to U.S. Treasury Bonds for Stable Asset Management: Understanding Interest Rates and Yields

With increasing economic uncertainty these days, more investors are seeking safe and steady returns. In particular, U.S. Treasury Bonds are regarded as the most trusted assets worldwide. Despite their low yields, they are attractive in terms of safety and liquidity.

This article covers everything from A to Z about U.S. Treasury Bond investments. Starting with the basic concepts of bonds, it introduces investment methods, potential risks, and asset allocation strategies optimized for Korean investors. Let’s especially clarify the relationship between interest rates and yields and learn how to build a portfolio aligned with your investment goals and risk tolerance.

Understanding Investment Starting with Bonds

A bond is fundamentally a promise to repay borrowed funds. When an investor provides funds to an issuing entity(government or corporation), the institution repays the principal on a set date and pays interest periodically.

At the government level, Treasury Bonds are issued to raise funds necessary for national operations. This is essentially the safest form of borrowing based on national credit. Interest is typically paid semiannually or annually.

The most actively traded product in the Treasury market is the 10-year U.S. Treasury note. This product is mainly traded for short-term investment purposes rather than for holding long-term. Because it serves as a benchmark interest rate in global financial markets, it is an important indicator for assessing economic conditions.

Types of U.S. Treasury Securities and Their Characteristics

The U.S. Department of the Treasury issues three types of securities. Understanding each helps make investment choices easier.

T-bill(Treasury Bills) are short-term securities with maturities under 1 year. They are virtually risk-free and highly liquid, allowing immediate cash conversion.

T-note(Treasury Notes) are medium-term securities with maturities from 1 to 10 years, offering moderate interest rates and risk levels.

T-Bond(Treasury Bonds) are long-term securities with maturities over 10 up to 30 years. They guarantee fixed interest over a longer period but are more sensitive to interest rate fluctuations.

During periods of economic recession concerns, stable Treasury Bonds become core assets in portfolios. U.S. Treasury yields serve as global benchmark rates and are used as international measures of risk-free returns.

Interest Rates and Yields: Moving in Opposite Directions

Yield(Yield) is called yield in English. To understand it, you need to know its relationship with bond prices. Yield is the expected return at the time of purchase divided by the purchase price.

In the market, bond prices fluctuate in real-time due to supply and demand. When demand for safe assets like Treasury Bonds increases, prices rise, and consequently, interest rates fall. Conversely, if selling pressure increases, prices fall, and interest rates rise.

Therefore, bond prices and interest rates always move in opposite directions. Properly understanding this relationship is the first step in developing an investment strategy.

When the economy is unstable, demand for long-term bonds surges. This causes long-term bond yields to fall and short-term yields to become relatively higher—a phenomenon often interpreted as a sign of an impending recession.

Four Major Strengths of U.S. Treasury Bond Investment

( 1. Top-Level Safety

Since the U.S. government guarantees principal and interest repayment, U.S. Treasury Bonds are virtually free of default risk. Even during economic crises, investors instinctively move their funds into U.S. Treasuries. This is why U.S. Treasury Bonds are called the ‘ultimate safe asset.’

) 2. Predictable Cash Flows

The fixed interest rate established at issuance guarantees a certain income. Since interest is typically paid every six months, it is ideal for retirees or conservative investors who need regular cash flow.

3. Excellent Market Liquidity

U.S. Treasury Bonds are the most traded bonds in the world. They can be sold easily at any time when needed, without waiting until maturity. This liquidity provides flexibility in portfolio adjustments.

4. Tax Efficiency

Interest from U.S. Treasury Bonds is subject only to federal income tax and is exempt from state and local taxes. For Korean investors, double taxation can be avoided under the U.S.-Korea tax treaty. This effectively increases after-tax returns.

Four Investment Risks Not to Overlook

Despite their reputation as safe assets, investing in U.S. Treasury Bonds involves clear risks.

1. Risk of Loss Due to Rising Interest Rates

If market interest rates rise after purchasing bonds, newly issued bonds will offer higher yields. As a result, the value of existing bonds declines. If you need to sell before maturity, you may incur losses.

2. Inflation Erosion

The weakness of fixed interest rates is that they cannot keep up with rising prices. If inflation exceeds the bond yield, real returns become negative. For example, earning a 2% yield while experiencing 3% inflation results in a 1% decrease in purchasing power.

Inflation-linked securities(TIPS) partially mitigate this risk, but regular bonds do not offer this protection.

3. Impact of Exchange Rate Fluctuations

This is especially important for Korean investors. If the U.S. dollar weakens, the returns measured in Korean won decrease when converted back. For example, even with a 3% yield, if the dollar depreciates by 5%, the return in won terms results in a loss.

4. Credit Risk(Theoretical Risk)

The possibility of the U.S. government defaulting is extremely low, but in extreme political or economic situations, it cannot be entirely ruled out. Historically, the U.S. has always honored its debt obligations, so this risk is practically very low.

How Investors Can Purchase U.S. Treasury Bonds Based on Their Profile

Depending on your investment goals, fund size, and management preferences, you can choose among three methods.

Method 1: Direct Purchase of Bonds

You can buy bonds directly through the U.S. government website###TreasuryDirect( or purchase in the secondary market via securities firms.

Advantages:

• Full control as the owner
• No management fees unlike mutual funds or ETFs
• Full repayment of principal and interest if held to maturity

Disadvantages:

• Purchase limit of $10,000 per person via TreasuryDirect
• Managing multiple bonds can be complex
• Potential losses if interest rates rise and bonds are sold early

Suitable for: Investors aiming for long-term holding, retirees, or very conservative investors seeking regular income.

) Method 2: Bond Fund Purchase

Pooling funds from multiple investors, bond funds create diversified portfolios managed by professional fund managers.

Advantages:

• Access to diversified bond portfolios with small amounts
• Professional active management
• Better diversification than individual bonds

Disadvantages:

• Management fees can eat into returns
• No control over individual bond selection
• Performance depends on fund manager

Suitable for: Investors seeking professional management and diversification, avoiding the hassle of direct management, especially those wanting stable returns.

Method 3: Bond Index Funds(ETFs)

Exchange-traded funds that track specific bond indices, operating passively.

Advantages:

• Much lower fees compared to active funds
• Can be traded freely on stock exchanges
• High transparency and liquidity

Disadvantages:

• Exposed to market volatility, with price fluctuations
• Tracking errors may occur
• Cannot respond actively to market changes

Suitable for: Investors who want to invest in bonds with minimal fees, trust market efficiency, and prefer passive investment.

Portfolio Optimization Strategies for Korean Investors

Strategic Combination of Korean and U.S. Treasury Bonds

Diversifying investments between Korean and U.S. Treasury Bonds offers several benefits.

Geographical and Currency Diversification: Holding bonds from both countries reduces exposure to economic crises in a single country. Simultaneous exposure to Korean won and U.S. dollar also mitigates exchange rate risks.

Utilizing Business Cycle Differences: The economic cycles of the two countries do not always align, so when one is struggling, the other may perform well. This increases overall portfolio stability.

Yield Curve Exploitation: When yields differ across maturities between Korea and the U.S., investors can optimize overall returns by adjusting allocations accordingly. For example, if Korean bonds offer higher yields at the same maturity, increasing their proportion can be advantageous.

Key Strategies: Currency Hedging

The biggest concern for Korean investors is exchange rate fluctuations. Currency risk can be hedged using derivatives like forward contracts.

Full Hedging: Fixing the exchange rate for the entire investment amount provides stability but forfeits potential gains from a favorable dollar appreciation.

Partial Hedging: For example, hedging only 50% of U.S. bond investments reduces currency risk by half while still allowing some benefit from dollar strength.

Currently, with the dollar strengthening, unhedged portions provide higher returns when converted to won.

( Key Strategies: Duration Matching

Duration)Duration( measures a bond’s sensitivity to interest rate changes and indicates the average time until cash flows are recovered.

If your goal is long-term principal preservation, a portfolio composed of long-term U.S. Treasuries offers predictable returns.

To reduce interest rate risk, it’s better to focus on bonds with shorter durations)1~3 years###.

Key Strategies: Tax Planning

Interest from U.S. Treasury Bonds is subject to U.S. federal tax but is exempt from state and local taxes. The U.S.-Korea tax treaty###DTA( prevents double taxation.

Investors should consult tax professionals to develop tax optimization strategies suited to their situation. It’s especially important to understand how to handle this income under Korean comprehensive income tax.

) Real Portfolio Example

Suppose a balanced portfolio consists of 50% Korean bonds and 50% U.S. Treasury Bonds.

This composition aims to achieve both principal preservation and regular income. It reduces dependence on a single country’s economy, spreading risk.

If 50% of U.S. bonds are hedged against currency risk, it can offset losses during dollar depreciation. Conversely, during periods of dollar strength like now, the unhedged portion offers higher returns in won terms.

This approach helps avoid worst-case scenarios while allowing for additional gains in favorable conditions.

Conclusion: The Path to Stable Asset Management

U.S. Treasury Bonds offer stable investment opportunities for both individual and institutional investors. However, understanding and managing risks such as interest rate fluctuations, inflation, and exchange rate movements is crucial.

For Korean investors, strategically combining U.S. and Korean Treasury Bonds can significantly enhance portfolio stability. Choosing the appropriate method—direct purchase, funds, or ETFs—based on your capital and management preferences—is key to success.

Through proper duration management, currency hedging, and tax planning, you can minimize risks and optimize returns. From a long-term asset management perspective, U.S. Treasury Bonds remain one of the most reliable options.