Complete Guide to U.S. Treasury Bond Investment: From Beginner to Expert in Treasury Yields

Understanding U.S. Treasury Bonds: The World’s Safest Investment Choice

What are U.S. Treasury Bonds (Government Bonds) in essence? Simply put, they are debt instruments issued by the U.S. government to raise funds from the market. The government commits to returning the principal and paying interest within a specified period.

Why are U.S. Treasury Bonds favored by investors worldwide? The core reason lies in the U.S. government’s top-tier credit rating globally, with near-zero risk of default. As a result, U.S. Treasury Bonds become the preferred safe-haven asset in international asset allocation and form the cornerstone of many investment portfolios.

Whether for individual investors, institutional entities, or central banks of various countries, U.S. Treasury Bonds are regarded as a vital source of stable income. Their high liquidity and market trading volume ensure investors can buy and sell at any time.

The Four Main Types of U.S. Treasury Bonds

Based on maturity and interest payment methods, U.S. Treasury Bonds are mainly divided into four categories:

Short-term Treasury Bills (T-Bills)

Features: Maturities of less than one year, typically issued with 4-week, 13-week, 26-week, or 52-week terms.

Interest Payment: Zero-coupon bonds issued at a discount. Investors purchase below face value and redeem at face value upon maturity, with the difference representing interest income.

Example: A $100 face value short-term T-Bill issued at 1% interest costs the investor $99. At maturity, the investor receives $100, earning $1.

Suitable for: Short-term investors with high liquidity needs, cash management requirements.

Medium-term Treasury Notes (T-Notes)

Features: Maturities ranging from 2 to 10 years, commonly issued with 2, 3, 5, 7, or 10-year terms.

Interest Payment: Paid semiannually, providing investors with regular, stable interest income.

Market Position: The 10-year U.S. Treasury Note is a key benchmark for global asset pricing and often serves as a market trend indicator.

Suitable for: Investors seeking stable medium-term yields and regular cash flow.

Long-term Treasury Bonds (T-Bonds)

Features: Maturities of 20 to 30 years, mostly issued with 30-year terms.

Interest Payment: Paid semiannually.

Liquidity: Despite long maturities, they can be freely traded in the secondary market, maintaining liquidity.

Suitable for: Long-term investors, those pursuing stable passive income, retirement fund allocations.

TIPS (Treasury Inflation-Protected Securities)

Mechanism: Principal is linked to the Consumer Price Index (CPI) and adjusts periodically.

Adjustment Logic:

• Inflation rises → Principal increases → Interest payments increase
• Inflation falls → Principal decreases (but not below original face value)

Example Calculation: Buying $1,000 face value TIPS with 1% annual interest. If inflation is 5% that year:

• Adjusted principal: $1,050
• Semiannual interest: $1,050 × 1% ÷ 2 = $5.25 (higher than the original $5)

Suitable for: Investors concerned about inflation eroding purchasing power, with strong needs for asset preservation.

What is the Yield on Government Bonds? Understanding the Return Calculation

Two core concepts of yield

Current Yield: The simplest measure, calculated as annual interest divided by the current purchase price.

Current Yield = Annual Interest ÷ Current Price × 100%

Yield to Maturity (YTM): Reflects the actual annualized return for investors, considering interest income, capital gains or losses, and holding period. YTM calculation is more complex, involving solving multi-variable equations.

How to Access Government Bond Yields

Investors do not need to calculate YTM themselves; they can obtain real-time data through:

Official Sources: The Federal Reserve and the U.S. Treasury publish daily yield curve data, highly authoritative.

Financial Platforms: Websites like Investing.com, CNBC, WSJ provide real-time updates on yields for various maturities.

Trading Platforms: Brokerage systems often offer filtering tools to check YTM data for specific maturities.

Three Ways to Buy U.S. Treasury Bonds in Taiwan

Method 1: Direct Purchase of Bonds

Process: Use overseas or local brokers to buy publicly traded bonds via custodial services.

Advantages:

• Full control over holding period and specific securities
• High liquidity, can sell in the secondary market anytime
• No management fees

Disadvantages:

• High minimum investment (usually starting at $1,000)
• Transaction commissions and bid-ask spreads are relatively high
• Requires sufficient capital

Recommendation: Overseas brokers offer a wider variety, faster quotes, and lower costs, making them more advantageous than local custodial services.

Method 2: Bond Funds

Mechanism: Fund managers pool investments into various bonds, and investors buy shares to share in the returns.

Features:

• Low minimum investment (hundreds of dollars)
• Diversification reduces risk
• Professional management simplifies decision-making

Cost Consideration: Management fees are charged, typically between 0.3% and 0.8% annually.

Method 3: Bond ETFs (Recommended)

Features: Traded like stocks on exchanges, combining diversification benefits of funds with stock trading convenience.

Cost Advantage: Management fees are much lower than traditional bond funds, with minimal trading costs.

Popular ETFs:

• TLT - Ultra-long-term U.S. Treasuries (20+ years)
• IEF - Intermediate-term U.S. Treasuries (7-10 years)
• SHY - Short-term U.S. Treasuries (1-3 years)
• VGSH - Short-term government bond index
• TIP - Inflation-protected bond fund
• GOVT - Broad U.S. Treasury investment

Suitable for: Small investors, cost-conscious investors, beginners.

Key Factors Affecting Bond Prices and Yields

Inverse Relationship Between Price and Yield

This is the fundamental rule in bond investing: Bond prices rise → yields fall; bond prices fall → yields rise.

The reason is that fixed cash flows mean that when prices increase, the effective yield decreases, and vice versa.

Internal Factors: Issuance Terms

Maturity length and coupon rate directly influence the initial issuance price. Longer-term bonds, with higher risk, are issued at lower prices to attract investors.

External Factors: Market Environment

Interest Rate Changes: When current interest rates rise, newly issued bonds have higher coupon rates, causing existing bonds to decline in value. Conversely, when rates fall, existing bonds increase in price. Recent Fed rate hikes have shown this clearly—bond prices declined, and yields soared to multi-year highs.

Economic Conditions: During recessions, risk appetite drops, and investors flock to government bonds for safety, pushing prices up. During economic booms, funds flow into higher-yield assets, reducing demand for bonds.

Inflation Expectations: Rising inflation drives up overall interest rates, lowering bond prices. Investors face erosion of real purchasing power, reducing fixed-income attractiveness. TIPS were created to hedge against this risk.

Issuance Scale Control: Moderate issuance generally does not disturb the market, but excessive issuance can disrupt supply and demand, leading to falling prices and rising yields.

Practical Investment Tips for U.S. Treasury Bonds

For Taiwanese investors, bond ETFs are the best starting point. They offer diversified exposure at minimal cost, ideal for those with limited budgets or focusing on core asset allocation.

When choosing maturities, consider your time horizon: use SHY or VGSH for short-term funds, IEF for medium-term, and TLT for long-term assets. If inflation risk concerns you, allocate some funds to TIPs as a hedge.

Since bond yields are dynamic, investment decisions should consider current economic conditions, Federal Reserve policy expectations, and inflation data. Regularly review your holdings and adjust allocations based on market environment to achieve stable returns within manageable risk.