Must-read before buying U.S. Treasury bonds | Complete investment guide to U.S. Treasury bonds

Why Invest in U.S. Treasury Bonds?

U.S. Treasury Bonds (also known as U.S. Government Bonds) are debt securities issued by the U.S. government, serving as proof of borrowing. The government commits to paying principal and interest within a specified period. Due to the U.S. government’s top-tier credit rating worldwide, U.S. Treasury Bonds are considered one of the safest investment tools, offering stable cash flow and high liquidity.

Many domestic and international institutional investors and individuals include them as an important part of their portfolios to balance risk and achieve stable returns.

Three Ways for Taiwanese Investors to Buy U.S. Bonds

1. Direct Purchase of Bonds (Secondary Market)

Buy existing government bonds through overseas brokers or via custodial trust. Compared to domestic custodial trust, overseas brokers offer more varieties and lower fees.

Purchase Process: Open a securities account → Search for bond code or set filtering criteria → Place order at market or limit price → Hold and receive periodic interest

Advantages: Highest liquidity, flexible allocation
Disadvantages: High minimum purchase (usually over $1000), higher transaction commissions

2. Bond Funds

Invest in funds that target government bonds, effectively diversifying risk by holding a basket of bonds.

Features: Low minimum investment (usually starting at $100), but management fees apply
Suitable for: Investors with limited budgets

3. Bond ETFs (Most Popular)

Trade freely on brokerage platforms like stocks, with transaction costs much lower than funds, suitable for small investments. Common products include:

• TLT (20+ years maturity)
• IEF (7-10 years maturity)
• SHY (1-3 years maturity)
• VGSH (short-term government bond index fund)
• TIP (Inflation-Protected Bond ETF)

Types of U.S. Treasury Bonds and How to Choose

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

Short-term Treasury Bills

Features: Maturity within 1 year, issued at 4-week, 13-week, 26-week, 52-week intervals
Issuance Method: Sold at a discount, no interest paid periodically
Example: Issued at 1% interest, investors buy at $99 for a $100 face value bond

Suitable for: Investors seeking liquidity and short-term cash management

Medium-term Treasury Notes

Features: Maturity of 2-10 years, pays interest semiannually
Issuance Cycles: Commonly 2, 3, 5, 7, 10 years
Market Role: The 10-year U.S. Treasury note is called the “global asset pricing anchor,” an important indicator for the bond market

Suitable for: Mid-term investors seeking stable cash flow

Long-term Treasury Bonds

Features: Maturity of 20-30 years (usually issued as 30-year bonds), pays interest semiannually
Liquidity: Despite long duration, actively traded in secondary markets, liquidity is good

Suitable for: Long-term investors needing stable income

Inflation-Protected Securities (TIPS)

Core Mechanism: Principal linked to Consumer Price Index (CPI)
Operation: When inflation rises, principal increases; interest is calculated on the adjusted principal

Example: Buying a $1000 face value, 1% interest TIPS. If inflation is 5%, principal adjusts to $1050, interest payment becomes $10.50 (higher than the original $10). At maturity, investors receive the higher of inflation-adjusted principal or original face value.

Suitable for: Investors worried about inflation eroding purchasing power

How Are U.S. Treasury Bonds Yield Calculated?

Two Main Yield Concepts

Current Yield = Annual interest ÷ Current price × 100%
This is the most straightforward calculation but does not reflect total investment return.

Yield to Maturity (YTM) is the actual annualized return an investor will receive if holding the bond until maturity, considering:

• Periodic interest income
• Difference between purchase price and face value
• Capital gains or losses during holding period

How to Quickly Check Yields?

No need for manual calculations; you can view via:

• Official Data: Federal Reserve or U.S. Treasury’s daily yield curve
• Financial Platforms: Investing.com, CNBC, WSJ, etc.
• Brokerage Platforms: Trading software often provides YTM filtering and inquiry functions

U.S. Treasury Auction Schedule (Important for Investors)

U.S. government bonds are issued regularly. Short-term T-Bills auction weekly; medium-term T-Notes monthly; long-term T-Bonds quarterly or in specific months. Check the official U.S. Treasury website for detailed schedules.

Key Factors Affecting U.S. Treasury Prices

Bond prices and yields have an inverse relationship—higher prices mean lower yields; lower prices mean higher yields.

Internal Factors: Maturity and Coupon Rate

Longer maturity and higher risk generally lead to lower issuance prices to compensate investors.

External Factors Have Major Impact

1. Federal Funds Rate
Rate increases → New bonds issued at higher yields → Existing bonds’ prices fall → Yields rise
Rate decreases → Existing bonds become more attractive → Prices rise

Recent Fed rate hikes have caused bond prices to drop sharply and yields to soar.

2. Economic Conditions
During recessions → Market interest rates decline → Funds flow into government bonds → Bond prices rise

3. Inflation
Rising inflation → Erodes real returns → Investors demand higher yields → Bond prices fall
Falling inflation → Bonds become more attractive → Prices rise

4. Issuance Volume Changes
Excess issuance → Oversupply → Price pressure
Moderate issuance → Market stability → Prices remain stable

Practical Comparison of Three Investment Methods

Core Advice: Beginners or those with limited capital should prioritize bond ETFs; investors with ample funds and seeking regular cash flow may consider direct purchase.

Common FAQs About Buying U.S. Bonds

Q: What does a yield curve inversion indicate?
A: Short-term yields higher than long-term, often signaling an upcoming recession, but also a good short-term investment opportunity.

Q: Are there tax issues when buying U.S. bonds in Taiwan?
A: Attention should be paid to interest income tax and currency exchange gains; consulting a tax professional is recommended.

Q: Can U.S. bonds default?
A: Historically, the U.S. has never defaulted; it holds the highest credit rating globally, so default risk is extremely low.

Q: When is the best time to buy U.S. bonds?
A: When yields are high, attracting investors; during economic downturns, for defensive positioning. Long-term investors can buy in installments.

Investment Risks of U.S. Bonds

Although U.S. bonds are the safest, risks include:

• Interest Rate Risk: Rising rates cause existing bond prices to fall
• Inflation Risk: Nominal returns may be eroded by inflation (TIPS can hedge this)
• Currency Risk: For Taiwanese investors, USD depreciation reduces returns
• Liquidity Risk: Some maturities or types may have limited liquidity

Final Investment Tips

Suitable if you:

• Seek stable, low-risk income
• Want to diversify your portfolio
• Have medium to long-term idle funds

Operational Suggestions:

1. Clarify your investment horizon and yield expectations
2. Choose maturity based on risk tolerance (short/mid/long-term)
3. Beginners should start with bond ETFs
4. Regularly review interest rate and inflation data
5. Consider asset allocation strategies

While returns are relatively conservative, U.S. bonds serve as a stable component in your portfolio, offering unmatched stability and liquidity.