The Complete Guide to Buying Bonds Starting with U.S. Treasury Bonds

As economic conditions become more unstable, many investors seek stable assets. In particular, U.S. Treasury bonds are recognized as one of the most reliable investment options in the global financial market. Understanding how to buy bonds properly allows for both long-term asset preservation and steady income. This guide covers everything from basic concepts to practical strategies for Korean investors starting to invest in U.S. Treasuries.

Bond Investment Basics: What Are Bonds?

Bonds are IOUs issued by governments or companies to raise funds. When an investor buys a bond, they receive regular interest payments from the issuer, and at maturity, they get back the full principal amount.

Bonds issued by the government are called Treasury bonds. The U.S. government issues Treasury bonds to fund national operations such as defense, social security, and infrastructure investments. Because they are backed by the government’s credit, they are much safer than bonds issued by individuals or corporations.

The most actively traded product in financial markets is the 10-year U.S. Treasury note. It is also used as an indicator of the macroeconomic health of the global economy and serves as a benchmark for currency and interest rate policies worldwide.

The 3 Types of U.S. Treasury Securities and Their Characteristics

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

T-bill (Short-term Treasury): Matures in less than one year, with virtually no risk and very high liquidity. Suitable for investors needing short-term funds.

T-note (Medium-term Treasury): Matures between 1 and 10 years. Offers higher yields than T-bills but less risk than long-term bonds, making it popular among many investors.

T-bond (Long-term Treasury): Matures from 10 to 30 years, providing fixed interest payments. Suitable for conservative investors aiming for long-term asset preservation.

Investor preferences vary with economic conditions. During recessions, safety-seeking funds flock to Treasuries, driving prices up and yields down. When economic outlook improves, funds shift to higher-yield assets like stocks, causing Treasury yields to rise.

Bond yield refers to the expected return expressed as a percentage of the purchase price at the time of buying. Bond prices and yields move inversely: when demand increases, prices go up and yields go down; when demand decreases, prices fall and yields rise.

4 Major Advantages of Investing in U.S. Treasuries

1. Exceptional Safety

U.S. Treasuries are guaranteed by the U.S. government to repay principal and interest, making them the safest investment. Even during economic downturns, the likelihood of default is extremely low, attracting global investors seeking security.

2. Predictable Regular Income

Treasuries pay a fixed interest rate established at issuance, typically semiannually. This stable cash flow is attractive to retirees and investors needing fixed income.

3. High Liquidity

The Treasury bond market is the largest bond market in the world, with daily transactions totaling trillions of dollars. This liquidity allows investors to sell before maturity if needed, providing 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 return compared to other investments with similar yields.

4 Key Risks of U.S. Treasury Investment

1. Interest Rate Risk

When market interest rates rise after purchasing a bond, new bonds are issued at higher rates, causing existing bond prices to fall. Selling before maturity in a rising rate environment can lead to losses. The longer the maturity, the more sensitive the bond price is to interest rate changes.

2. Inflation Risk

Since Treasuries pay fixed interest, if inflation exceeds the yield, real returns diminish. For example, holding a 3% yield bond during 4% inflation results in a net loss of 1%. Treasury Inflation-Protected Securities (TIPS) are designed to mitigate this risk.

3. Currency Risk

For Korean investors, exchange rate fluctuations are significant. When the dollar weakens, converting returns to won reduces gains; when the dollar strengthens, investors can benefit from favorable exchange rates.

4. Credit Risk

While the risk of the U.S. government defaulting is very low, it is not zero in theory. Historically, the U.S. has honored its debt obligations faithfully, so credit risk is minimal for U.S. Treasuries.

How to Buy Bonds: 3 Investment Approaches Compared

Depending on investment goals, capital size, and involvement level, there are three main ways to invest in U.S. Treasuries:

1. Direct Purchase

Method: Buy directly from the U.S. government or through securities firms in the secondary market.

Individual investors can purchase Treasuries directly via the TreasuryDirect website.

Advantages:

• No fund manager fees
• Receive regular interest payments until maturity
• Get back full principal at maturity
• Full control over individual bonds

Disadvantages:

• Purchase limit of $10,000 per transaction on TreasuryDirect
• Need to buy multiple bonds separately for diversification
• Selling before maturity in a rising rate environment may incur losses
• Managing individual bonds requires time and effort

Suitable for: Conservative investors planning to hold long-term, retirees seeking stable income, active investors managing their portfolios directly.

2. Bond Funds (Mutual Funds)

Method: Pool funds from multiple investors to be managed by professional portfolio managers who hold diversified bond portfolios.

Advantages:

• Professional management
• Diversification with small capital
• Reduced risk from individual bond defaults
• Regular income distributions

Disadvantages:

• Management fees (around 0.5–1%) reduce returns
• No direct control over individual bonds
• Performance depends on fund manager’s skill
• Hard to know exact holdings of the fund

Suitable for: Investors wanting professional management, small investors seeking diversification, medium-scale investors pursuing active management.

3. Bond ETFs (Exchange-Traded Funds)

Method: Invest in ETFs that track bond indices (e.g., Bloomberg Aggregate Bond Index).

Advantages:

• Low expense ratios (around 0.03–0.15%)
• Trade like stocks on exchanges in real-time
• High liquidity for flexible trading
• Transparent index tracking

Disadvantages:

• Price volatility similar to stocks
• ETF prices can fluctuate even if underlying bonds are stable
• Tracking errors may occur
• No active management benefits

Suitable for: Cost-conscious investors, traders wanting flexibility, passive investors.

Core Concept: Duration

Duration measures how sensitive a bond’s price is to interest rate changes. It’s crucial for deciding when and what to buy.

• Shorter duration: Less affected by interest rate changes
• Longer duration: More sensitive to rate fluctuations

In environments where rates are expected to rise, shorter-duration bonds (like short-term Treasuries) are preferred; when rates are expected to fall, longer-duration bonds (long-term Treasuries) may be advantageous.

Professional Investment Strategies for Korean Investors

1. Currency Hedging

The biggest concern for Korean investors in U.S. Treasuries is exchange rate risk. A weakening dollar reduces returns when converted to won.

Currency Hedging: Use derivatives like forward contracts to lock in exchange rates and reduce risk.

Trade-off: Hedging reduces currency risk but adds costs, lowering overall returns.

Balanced Approach: Hedge only 50% of the U.S. Treasury investment, leaving the rest unhedged. This way, investors can benefit from dollar strength and mitigate losses during dollar weakness.

2. Tax Optimization

Interest from U.S. Treasuries is taxable at the federal level but exempt from state and local taxes. Both Korea and the U.S. have a Double Taxation Avoidance Agreement (DTA) to prevent double taxation.

Consult tax professionals to develop strategies to minimize taxes, especially for large investments.

3. Duration Matching Strategy

Adjust the duration of Korean and U.S. bond holdings to optimize interest rate sensitivity.

• Conservative: Focus on long-term bonds for stability
• Balanced: Mix of medium-term bonds for risk/return balance
• Aggressive: Increase short-term bonds to reduce rate risk

Practical Example: 50:50 Korea-U.S. Treasury Portfolio

Suppose you allocate equally between Korean and U.S. Treasuries.

Portfolio Composition:

• 50% Korean bonds: stable won-denominated income
• 50% U.S. Treasuries: dollar diversification and global asset allocation

Expected Benefits:

• Risk diversification: downturn in Korea may be offset by U.S. market gains
• Currency diversification: exposure to both won and dollar
• Income stability: different interest rate cycles reduce overall volatility

Scenario Analysis:

• Dollar appreciation: U.S. portion gains in dollar terms
• Dollar depreciation: Korean bonds provide relative stability
• Market sideways: steady income from both markets

This approach offers automatic risk balancing aligned with economic shifts, without active management.

Conclusion: The Key to Bond Investing

U.S. Treasuries are among the safest and most trusted investment instruments globally. Understanding how to buy bonds and aligning strategies with your goals can help you achieve both stable income and asset preservation.

For Korean investors, additional considerations like exchange rates, taxes, and interest rate movements are important. Combining U.S. Treasuries with Korean bonds in a diversified portfolio can effectively manage these risks. Choosing the right method—direct purchase, funds, or ETFs—and regularly reviewing and adjusting your portfolio are essential steps toward successful bond investing.