A Complete Guide to US Treasury Bond Yields and Returns: What Korean Investors Must Know

In an era of economic turbulence, the importance of asset protection is increasing day by day. During this process, it becomes clear that the global financial markets move based on the U.S. Treasury bond yields. U.S. Treasuries, backed by the creditworthiness of the U.S. government, are more than just investment products; they are assets that serve as a core pillar of a portfolio. Although the nominal interest rates may be modest, the liquidity that can be cashed out at any time and the regular interest income attract investors.

This article takes a layered approach, covering the concept of U.S. Treasury yields, the actual purchase methods, and practical strategies for Korean investors. We will especially look into real-world concerns such as exchange rate risk management, tax optimization, and portfolio construction.

Starting with the fundamental concept of bonds

A bond is a borrowing certificate issued by the borrower to the investor. The investor lends money, and the borrower promises to repay the principal on the agreed maturity date. During this process, regular( semi-annual or annual) interest payments are made.

From the government’s perspective, if there is a shortage of funds needed for fiscal operations, it borrows money from citizens, institutions, or foreign investors. In return, it pays interest, which is what we call government bonds. The most traded product in the global bond market is the 10-year U.S. Treasury bond. This bond is mainly traded for short-term gains rather than holding to maturity.

Classification and characteristics of U.S. Treasuries

U.S. Treasury securities issued by the Department of the Treasury are broadly divided into three types.

T-bill(: Short-term securities with maturities of less than 1 year, virtually risk-free and highly liquid.

T-note): Medium-term securities with maturities between 1 and 10 years.

T-Bond(: Long-term securities with maturities of 10 to 30 years, offering fixed interest rates.

During economic downturns, these stable assets play a central role in diversified investment portfolios.

Another reason why U.S. Treasuries are important is that they serve as a compass for financial markets. U.S. Treasury yields set the benchmark for interest rates worldwide and are used by various institutions as a standard for risk-free expected returns. In particular, the 10-year yield is a key indicator of the macroeconomic health of the global economy.

Paradoxical relationship between interest rates and yields

Generally, longer maturities entail greater uncertainty, so long-term interest rates should be higher than short-term ones. However, when an economic crisis is imminent, demand for safe assets surges, causing long-term bond prices to rise and yields to fall. This creates an inverted) inverse( yield curve, signaling a potential recession.

Yield) refers to the expected return calculated relative to the bond’s purchase price. In the secondary market, bond prices differ from the issuance price and fluctuate constantly based on supply and demand.

When demand for safe assets increases, bond prices go up, and yields go down. Conversely, if there is increased selling pressure, prices fall and yields rise. In other words, bond prices and interest rates move in opposite directions. This dynamic reflects investor sentiment and market risk appetite.

Four strengths of investing in U.S. Treasuries

( 1. Highest reliability

Guaranteed repayment by the U.S. government makes it the safest investment. During economic downturns, investors flock to U.S. Treasuries because the probability of default is virtually zero.

) 2. Fixed interest income

A fixed interest rate is set at issuance, typically paid semi-annually. This makes it an ideal choice for retirees relying on regular income.

( 3. Excellent liquidity

U.S. Treasuries are actively traded throughout the day in the bond market. You can hold them until maturity or sell immediately if cash is urgently needed. This high liquidity greatly facilitates portfolio rebalancing.

) 4. Tax benefits

Interest from U.S. Treasuries is subject to federal income tax but exempt from state and local taxes. As a result, the after-tax real return can be improved.

Four unavoidable risks

1. Interest rate risk

If interest rates rise after purchasing bonds, newly issued bonds will offer higher yields, reducing the relative attractiveness of existing bonds. Selling before maturity during such a period may result in losses.

2. Inflation risk

Bonds paying fixed interest are vulnerable to inflation, which erodes real purchasing power when prices rise. Except for inflation-linked bonds###TIPS###, regular government bonds do not provide protection against this risk.

( 3. Currency risk

Particularly important for Korean investors. When the dollar weakens, the value of interest and principal denominated in dollars, converted into Korean won, can decline.

) 4. Credit risk

In theory, even the U.S. government could default. However, the probability is extremely low, reflected in the high credit rating of the U.S.

Practical options for purchasing U.S. Treasuries

Depending on investment goals, risk appetite, and preferences, there are three main methods.

Method 1: Direct purchase

Buy individual bonds directly through the Department of the Treasury’s website or securities firms. Using the TreasuryDirect platform allows direct purchase from the government.

Advantages:

• Full control over investment decisions
• No management fees unlike funds
• Full principal and interest repayment if held to maturity

Disadvantages:

• Purchase limit of $10,000 per transaction
• Requires significant capital and management effort for diversification
• If sold before maturity during rising interest rates, may have to sell at a discount

Suitable for: Conservative investors seeking stable long-term investment and planning to hold until maturity, retirees seeking regular income

Method 2: Bond mutual funds

Professional fund managers pool funds from multiple investors to create and manage diversified bond portfolios.

Advantages:

• Diversification reduces risk of individual bonds
• Active management adapts to market conditions
• Access to a variety of bonds with small investment amounts

Disadvantages:

• Management fees reduce overall returns
• No direct control over individual bonds

Suitable for: Investors who want to avoid the hassle of managing individual bonds, seeking professional management, and pursuing long-term stable returns with risk aversion

( Method 3: Bond index funds)ETF###

Exchange-traded funds that track specific bond indices passively.

Advantages:

• Low fees due to passive management
• Traded on stock exchanges, offering high liquidity and flexibility

Disadvantages:

• Price fluctuations due to market volatility despite underlying asset stability
• Slight tracking errors caused by management and transaction costs
• No active management benefits in response to market changes

Suitable for: Investors wanting low-cost exposure to U.S. Treasuries, preferring self-directed investing over fund managers, and trusting market efficiency

Strategic combination of Korean and U.S. Treasuries

Holding bonds from both countries allows for more sophisticated portfolio construction.

Benefits of combined investment

Regional diversification: Mixing Korean and U.S. bonds reduces exposure to risks specific to one country’s economy, such as political instability or sudden interest rate changes.

Currency diversification: Holding assets denominated in KRW### and USD### can offset exchange rate risks. When the won weakens, dollar-denominated assets increase in KRW value, and vice versa.

Asynchronous economic cycles: The economies of Korea and the U.S. do not always move in sync. While one is in recession, the other may be growing, stabilizing returns.

Yield optimization: If Korean bonds offer higher yields at the same maturity, investors can build a stable base with U.S. Treasuries and maximize returns by increasing Korean bond holdings. When interest rate differentials widen, arbitrage opportunities may arise.

Practical strategies for Korean investors

Exchange rate risk management: The biggest concern for Korean investors is exchange rate fluctuations. Hedging via derivatives like forward contracts can lock in rates but may reduce returns. A balanced approach is to hedge about 50% of the investment and leave the rest exposed to currency movements. During dollar appreciation, unhedged portions yield higher returns; during dollar depreciation, hedged portions help prevent losses.

Matching duration: Duration measures a bond’s sensitivity to interest rate changes. For principal preservation, long-term U.S. Treasuries offer stable and predictable returns. Conversely, mixing short-term bonds can reduce interest rate risk.

Tax considerations: U.S. Treasury interest is taxable at the federal level and may be taxed in Korea. Fortunately, the double taxation avoidance agreement (DTA) between Korea and the U.S. prevents double taxation on the same income. Consulting a tax professional is essential.

( Portfolio construction example

Suppose a balanced portfolio with 50% Korean bonds and 50% U.S. Treasuries. This setup aims to preserve principal while generating income.

It reduces dependence on a single country, lowering risk. The portfolio value in KRW can fluctuate with exchange rates.

Assuming 50% of U.S. Treasuries are hedged against currency risk, and the remaining 50% are exposed, during dollar strength, unhedged parts yield higher returns. Conversely, during dollar weakness, hedged parts buffer losses.