Safe Asset US Treasury Bond Yield Investment: A Complete Guide Even Beginners Can Understand

As economic uncertainty increases, investors are paying more attention to safe asset allocation. In particular, U.S. Treasury yields serve as a macro indicator in the global financial markets and also act as an important benchmark for individual investors’ asset allocation decisions. In this article, we will explore practical investment perspectives, including specific methods for investing in U.S. Treasuries, the relationship between interest rates and yields, and the exchange rate risks Korean investors should consider.

Basic Principles of Bond Investment: What Are Government Bonds?

Bonds are similar to IOUs. Investors lend money to the borrower, who then repays the principal at a set maturity date and makes regular interest payments.

When a government needs funds for national operations, it issues government bonds to raise capital from individuals and institutions. Among U.S. Treasury securities, the most actively traded are 10-year Treasury notes. In the secondary market, 10-year notes are mainly traded by investors seeking trading profits rather than holding to maturity.

Key to Understanding U.S. Treasury Yields: The Inverse Relationship Between Price and Interest Rate

Bond prices fluctuate constantly in the market. When demand for government bonds increases, their prices rise, and U.S. Treasury yields fall. Conversely, when demand decreases, prices fall and yields rise.

Yield( is the expected return on a bond, calculated by dividing the expected income by the purchase price. Therefore, bond prices and yields always move in opposite directions. The U.S. Treasury yield can be seen as a mirror reflecting investor sentiment in real-time.

During recessions, a flight to safety increases demand for government bonds, leading to rising bond prices and falling yields. Conversely, expectations of economic recovery tend to boost risk appetite, causing Treasury yields to rise.

The Three Types of U.S. Treasury Securities and Their Maturity Characteristics

T-bill)Short-term Treasury(: Maturity less than 1 year, virtually no risk, high liquidity
T-note)Medium-term Treasury(: Maturity 1–10 years, moderate interest rate
T-bond)Long-term Treasury(: Maturity 10–30 years, fixed interest rate ensuring long-term cash flow

Longer maturities generally entail greater future uncertainty, so long-term yields should typically be higher than short-term yields. However, during fears of recession, demand for long-term bonds can surge, leading to yield curve inversion, which is often interpreted as a recession signal.

Four Key Advantages of Investing in U.S. Treasuries

1. Highest Safety
The creditworthiness of the U.S. government is among the highest globally. Default risk is virtually nonexistent, and safe-haven demand tends to increase during economic downturns.

2. Fixed Income Generation
Interest rates are fixed at issuance, with regular payments typically made semiannually)6 months(. Ideal for investors needing stable income, such as retirees.

3. Excellent Liquidity
U.S. Treasuries are among the most actively traded assets in the bond market. You can hold to maturity or sell at any time, facilitating portfolio adjustments.

4. Tax Benefits
Interest income is subject to federal tax but exempt from state and local taxes, resulting in relatively higher after-tax returns.

Four Risks You Must Know When Investing in U.S. Treasuries

1. Interest Rate Risk
If interest rates rise after purchase, existing bonds with lower rates decline in value because new bonds are issued at higher yields. Selling before maturity may result in losses.

2. Inflation Risk
Fixed-rate bonds are vulnerable to inflation; if inflation exceeds the fixed rate, real returns decrease. Inflation-linked securities)TIPS( can hedge against this risk.

3. Exchange Rate Risk
For foreign investors, currency fluctuations are significant. A weakening dollar can reduce returns when converted back to your local currency.

4. Credit Risk
While the risk of U.S. government default is extremely low, political turmoil or economic crises could pose theoretical risks.

How to Purchase U.S. Treasuries: Investment Style Guide

) 1( Bond ETFs: Most Practical for Beginners

Bond index funds)ETF### track U.S. Treasury indices and are listed on exchanges.

Advantages: Low fees, diversified exposure to various bonds, traded like stocks, easy access
Disadvantages: Passive management means missing out on active yield enhancement, market volatility affects even stable underlying bonds
Suitable for: Investors seeking low-cost entry or trusting market efficiency over active management

) 2( Bond Funds: When You Want Professional Management

Pooling investor funds, these funds are actively managed by professional fund managers.

Advantages: Diversification across bonds, active portfolio adjustments based on market conditions, accessible with small capital
Disadvantages: Management fees reduce net returns, less direct control over individual bonds
Suitable for: Risk-averse investors who prefer professional management and want to avoid direct bond selection

) 3### Direct Purchase: When You Want Control

Buy directly from the U.S. government via TreasuryDirect or through brokerage accounts in the secondary market.

Advantages: No management fees, full control over investment decisions, guaranteed interest and principal at maturity
Disadvantages: Limit of $10,000 per person per issue, need multiple bonds for diversification, potential losses if selling early during rate rises
Suitable for: Conservative investors planning to hold to maturity, retirees needing regular income

Practical Strategies for Korean Investors: U.S. and Korean Bond Portfolios

) Diversification Effect

A portfolio comprising 50% Korean government bonds and 50% U.S. Treasuries can achieve regional and currency diversification, reducing exposure to any single economy’s risks while leveraging strengths of both markets.

Holding bonds denominated in KRW###KRW) and USD###USD( simultaneously naturally hedges currency risk. When the dollar appreciates, the KRW value of U.S. Treasuries increases; when the dollar weakens, KRW-based bonds offer relative stability.

) Practical Strategy 1: Selective Currency Hedging

For Korean investors most concerned about exchange rate risk, consider hedging only 50% of U.S. Treasuries. This approach partially protects against sharp currency fluctuations while still capturing potential dollar appreciation.

Hedging incurs costs, but selective hedging balances risk management expenses with potential gains.

( Practical Strategy 2: Duration Matching

Duration)Duration### measures a bond’s sensitivity to interest rate changes, representing the average time until cash flows are received.

If capital preservation is the goal, a portfolio with longer-maturity U.S. Treasuries offers stability. To reduce sensitivity to interest rate volatility, include shorter-duration bonds###T-bill, short-term Treasury(.

) Practical Strategy 3: Tax Efficiency Check

Interest income from U.S. Treasuries is taxable at the U.S. federal level and may also be taxed in Korea. Fortunately, the U.S.-Korea Double Taxation Agreement(DTA) prevents double taxation on the same income.

For large investments, consulting a tax professional beforehand helps optimize tax treatment.

Real-World Example: 50:50 Diversified Portfolio

Let’s consider a balanced portfolio:

• 50% Korean government bonds: providing stability in KRW
• 50% U.S. Treasuries: offering dollar-based global diversification

Scenario 1 - Dollar Appreciation
Unhedged U.S. Treasuries yield higher returns in KRW terms, boosting overall portfolio value.

Scenario 2 - Dollar Depreciation
Hedged U.S. Treasuries offset currency losses, protecting portfolio returns.

This structure helps maintain overall balance even when one market underperforms.

Conclusion: Reading Safe Investment Signals from U.S. Treasury Yields

U.S. Treasury yields are not just about returns—they reflect global economic sentiment. U.S. Treasuries offer stable income opportunities for both individual and institutional investors.

To succeed, understanding the relationship between interest rates and yields, currency risks, and duration management is essential. For Korean investors, combining U.S. and Korean bonds can simultaneously diversify portfolios and stabilize income.

Choose among various investment methods—direct purchase, funds, ETFs—based on your capital, risk appetite, and management capacity. Beginners are recommended to start with low-fee, highly liquid ETFs.