Understanding U.S. Treasury Yields and Investment Guide: Everything About Safe Assets

As the global economy becomes more uncertain, many investors are seeking safe assets. Among them, the U.S. Treasury yield functions as a key indicator in the global financial markets and attracts attention from individual and institutional investors alike. The U.S. Treasury, based on the United States’ creditworthiness, symbolizes a safe asset reflecting the macro stability of the world economy. This article comprehensively explores the meaning of the U.S. Treasury yield, investment mechanisms, and practical strategies for Korean investors.

Starting with the Basic Principles of Bonds

A bond is fundamentally a credit agreement between an investor and a borrower. Investors provide funds to the government or corporations, and the borrower repays the principal at a set maturity date while paying periodic interest.

Generally, government-issued securities to finance national operations are called government bonds. Bonds issued by the U.S. Department of the Treasury are evaluated as the highest in stability and liquidity worldwide. Currently, the most actively traded product in the international bond market is the U.S. 10-year Treasury bond, which serves as a benchmark for global interest rates beyond just an investment product.

Classification of U.S. Treasuries and the Meaning of Yields

The U.S. Department of the Treasury issues three types of bonds. T-bills(maturity less than 1 year) are short-term securities with minimal risk and high liquidity. T-notes(maturity 1–10 years) are medium-term bonds, and T-Bonds(maturity 10–30 years) are long-term bonds offering fixed interest rates.

To understand the U.S. Treasury yield, it is important to distinguish between ‘interest rate’ and ‘yield.’ The fixed interest rate at issuance is called the coupon rate, while the expected return based on actual trading prices in the secondary market is called the yield(yield).

In the secondary market, bond prices fluctuate in real-time based on supply and demand. When demand for safe assets like Treasuries increases, bond prices rise and the U.S. Treasury yield falls. Conversely, when demand decreases, bond prices fall and the U.S. Treasury yield rises. This inverse relationship indicates that the U.S. Treasury yield is a key indicator reflecting market sentiment and economic outlook.

Generally, when recession fears increase, demand for long-term bonds surges, causing long-term yields to plummet, which is interpreted as a sign of economic slowdown. The U.S. 10-year Treasury yield functions as a trust indicator for the global economy, which is why it is so significant.

Four Key Benefits of Investing in U.S. Treasuries

1. Top-tier safety

Supported by the U.S. government’s debt repayment guarantee, U.S. Treasuries are the most reliable investment instrument. Even during economic crises, investors flock to U.S. Treasuries, which are perceived as having virtually no default risk.

2. Predictable cash flow

Fixed interest rates are set at issuance, typically paying interest semiannually. This makes them ideal for retirees or conservative investors who require regular and stable income.

3. Excellent liquidity

U.S. Treasuries are among the most actively traded securities in the bond market. They can be held until maturity or sold at any time, facilitating portfolio adjustments.

4. Tax benefits

While federal taxes are levied, state and local taxes are exempt, resulting in relatively higher after-tax returns.

Four Investment Risks to Watch Out For

1. Interest rate risk

When U.S. Treasury yields rise, the attractiveness of newly issued bonds increases, causing existing bond prices to fall. Selling bonds before maturity may result in losses.

2. Inflation risk

Fixed interest rates may lead to reduced real returns if inflation exceeds the fixed rate. TIPS (Treasury Inflation-Protected Securities) can mitigate this risk, but regular Treasuries do not.

( 3. Currency risk

Foreign investors are directly affected by currency fluctuations. A weakening dollar can reduce returns when converted into their local currency.

) 4. Credit risk

While theoretically, the U.S. government could default, its historical creditworthiness and current high credit rating make the actual risk extremely low.

Pros and Cons of Investment Methods

Step 1: Direct Bond Purchase

Buying U.S. Treasuries directly from the U.S. Department of the Treasury via TreasuryDirect or through securities firms in the secondary market.

Advantages: No management fees, guaranteed interest payments and full principal repayment if held to maturity.

Disadvantages: Online direct purchases are limited to a maximum of $10,000 per transaction; diversifying a portfolio requires significant capital and management effort.

Suitable for: Investors aiming for long-term holding and seeking stable income, such as retirees or conservative investors.

Step 2: Using Bond Funds

Mutual funds that pool investors’ money and are managed by professional fund managers to hold diversified bond portfolios.

Advantages: Diversification reduces individual bond risk; active management captures market opportunities; accessible with smaller capital.

Disadvantages: Management fees lower net returns; no direct control over individual bonds.

Suitable for: Investors seeking professional management, diversification, and long-term stable returns.

Step 3: Choosing ETFs

Passive funds that track specific bond indices, traded on stock exchanges like stocks.

Advantages: Lower fees compared to active funds; high liquidity; transparent index tracking with predictable performance.

Disadvantages: Exposed to market volatility; tracking errors may occur; limited ability to respond actively to market changes.

Suitable for: Investors who prefer low-cost, index-based passive investing with the flexibility of stock trading.

Strategic Portfolio Construction for Korean Investors

When Korean investors invest in U.S. Treasuries, additional considerations are necessary.

1. Currency Hedging Strategies

USD/KRW exchange rate fluctuations are a significant risk. Using derivatives like forward contracts to lock in exchange rates can reduce currency risk. However, hedging involves opportunity costs, so a mixed approach—hedging part of the investment and leaving some exposure—may be optimal.

2. Duration Matching

Adjusting the duration (interest rate sensitivity) of the portfolio by balancing Korean and U.S. Treasuries can align with investment goals. For long-term principal preservation, longer-duration bonds provide stability.

( 3. Tax Optimization

Interest from U.S. Treasuries is subject to U.S. federal tax and also taxed in Korea. The Korea-U.S. Double Taxation Agreement (DTA) can minimize tax burdens; consulting tax professionals is recommended.

) 4. Diversification Synergy

A balanced portfolio of 50% Korean bonds and 50% U.S. Treasuries can leverage regional economic cycle differences to reduce volatility. Currency fluctuations can also help mitigate portfolio value changes.

Final Summary

Understanding U.S. Treasury yields is essential for modern investors. U.S. Treasuries are more than just investment products; they are indicators reflecting global economic outlooks and are key to portfolio stability. Korean investors should consider factors like exchange rates, taxation, and regional diversification to develop tailored U.S. Treasury investment strategies aligned with their goals and risk tolerance.