How to Buy U.S. Bonds: From Safe Investing to Maximizing Returns

In today’s uncertain economic environment, many investors are considering stable asset allocations. Especially, U.S. bonds are regarded as the most trusted safe assets in the global financial market, offering predictable returns and high liquidity at the same time. This article covers the basics of buying U.S. bonds, along with detailed strategies to maximize investment returns and effectively manage risks.

Understanding U.S. Bonds: Treasury Securities and Yields

Bonds are debt certificates issued by governments or corporations to raise funds. Bond issuers repay the principal (face value) at maturity and typically pay interest semiannually or annually. U.S. Treasury securities are a way for the government to borrow funds from domestic and international investors when fiscal funds are insufficient.

Currently, the most actively traded product in the Treasury market is the 10-year U.S. Treasury note, mainly bought and sold in the secondary market for investment purposes. Bond interest rates and yields are different concepts. Yield indicates the expected return based on the purchase price and fluctuates in real-time in the secondary market. When demand increases, bond prices rise and yields fall; when demand decreases, prices fall and yields rise. Therefore, bond prices and yields have an inverse relationship, reflecting market sentiment.

Types and Features of U.S. Bonds

U.S. Treasury securities are classified into three categories based on maturity:

• T-Bills (Treasury Bills): Maturities under 1 year, virtually risk-free, highly liquid.
• T-Notes (Treasury Notes): Maturities from 1 to 10 years, the most actively traded Treasury securities.
• T-Bonds (Treasury Bonds): Maturities from 10 to 30 years, offering fixed interest rates.

Treasuries are core components of diversified portfolios during volatile economic periods. Their yields serve as benchmarks for interest rates and are used by financial institutions as risk-free rate measures. Notably, the 10-year Treasury yield is a key indicator of global economic health.

How to Buy U.S. Bonds: 3 Investment Methods Compared

Investing in U.S. bonds varies depending on individual goals, risk tolerance, and preferences.

1. Direct Purchase of Bonds

Individual investors can buy U.S. Treasury securities directly from the Treasury via the TreasuryDirect website or purchase bonds in the secondary market through brokerage firms.

Advantages: Direct ownership grants full control over investment decisions. Unlike mutual funds or ETFs, there are no management fees. Holding to maturity provides regular interest income and full principal repayment.

Disadvantages: Individual purchase limits are capped at $10,000 per transaction. Diversification requires buying multiple bonds, demanding significant capital and management effort. Selling before maturity may incur losses if interest rates have risen.

Suitable for: Conservative investors planning to hold bonds to maturity, retirees seeking stable income, and investors who prefer managing their portfolios directly.

2. Bond Fund Investment

Bond funds pool money from multiple investors to create diversified bond portfolios managed by professional fund managers.

Advantages: Exposure to a variety of bonds reduces risk associated with individual bonds. Active management adjusts portfolios based on market conditions. Allows small investments for diversification.

Disadvantages: Management fees reduce net returns. Investors have no direct control over individual bonds.

Suitable for: Investors seeking professional management, long-term stable income, and risk-averse investors aiming for diversification.

3. Bond Index Funds (ETFs)

ETFs track specific bond indices, such as U.S. Treasury bond indices, and are traded on stock exchanges.

Advantages: Passive management results in lower fees. Can be bought and sold like stocks, offering high liquidity and flexibility. Generally more cost-effective than actively managed funds.

Disadvantages: Market volatility can affect prices even if underlying bonds are stable. No active management to capitalize on market movements.

Suitable for: Investors preferring low-cost, passive investment, who trust market efficiency, and want to avoid active management fees.

Four Benefits of Investing in U.S. Bonds for Stable Income

1. Excellent Safety

U.S. bonds are backed by the U.S. government, offering the highest safety level. During economic downturns, investors flock to U.S. Treasuries, which carry virtually no default risk.

2. Predictable Income Structure

U.S. bonds pay fixed interest rates at issuance, typically semiannually. This provides stable cash flow, ideal for retirees needing reliable income.

3. High Liquidity

The Treasury market is one of the most active bond markets worldwide. U.S. bonds can be sold easily at any time, providing flexibility for portfolio rebalancing before maturity.

4. Tax Efficiency

Interest income from U.S. bonds is subject to federal income tax but exempt from state and local taxes. This can enhance after-tax returns, especially advantageous for investors in high-tax regions.

Four Risks to Watch Out for When Investing in U.S. Bonds

1. Interest Rate Risk

Bond prices and interest rates move inversely. When rates rise after purchase, existing bonds with lower rates become less attractive, potentially leading to capital losses if sold before maturity.

2. Inflation Erosion Risk

Fixed-rate bonds may not keep pace with inflation, reducing real purchasing power if inflation exceeds bond yields. Inflation-linked bonds (TIPS) offer protection but are not standard Treasuries.

3. Currency Exchange Risk

For non-U.S. investors, fluctuations in the dollar exchange rate impact returns. A weakening dollar reduces the value of interest and principal when converted back to local currency.

4. Credit (Default) Risk

While the U.S. government has a top credit rating and a strong history of repayment, political or economic upheavals could theoretically lead to default, though such risks are minimal.

Investment Strategies for Korean Investors in U.S. Bonds

1. Currency Hedging

The main concern for Korean investors is exchange rate fluctuation. Currency risk can be mitigated using derivatives like forward contracts to lock in exchange rates, reducing uncertainty. Partial hedging—hedging only part of the exposure—can balance risk and potential gains from favorable currency movements.

2. Duration Matching

Duration measures a bond’s sensitivity to interest rate changes. Korean investors should align the duration of their U.S. bond holdings with their investment horizon and risk appetite. Longer durations offer stable, predictable income but are more sensitive to rate changes; shorter durations reduce interest rate risk.

3. Tax Optimization

Interest from U.S. bonds is taxed at the federal level, and Korea also taxes foreign income. The Korea-U.S. Double Taxation Agreement (DTA) helps prevent double taxation. Consulting tax professionals ensures proper tax planning and compliance.

Building an Optimal Portfolio with Korean Bonds and U.S. Bonds

Combining Korean and U.S. bonds creates a diversified portfolio, leveraging the strengths of each market while mitigating risks.

Benefits of Diversification

• Regional and Currency Diversification: Investing in different economies reduces dependence on a single country’s economic health.
• Natural Currency Hedge: Holding bonds in KRW and USD can offset currency fluctuations; when KRW weakens, USD-denominated bonds increase in local currency value, and vice versa.
• Economic Cycle Differentiation: Korea and the U.S. may experience different phases of economic cycles, smoothing overall portfolio returns.

Example Portfolio

A balanced portfolio with 50% Korean government bonds and 50% U.S. bonds can provide principal protection and steady income. Investors might hedge part of the U.S. bond exposure against currency risk to enhance stability, especially during periods of dollar strength (e.g., 2026).

Conclusion

U.S. bonds offer stable investment opportunities for both individual and institutional investors. Achieving consistent returns requires understanding interest rate movements, inflation, and currency risks. For Korean investors, strategic allocation between U.S. bonds and Korean government bonds can enhance diversification and income stability.

Various methods—direct purchase, bond funds, ETFs—are available, and choosing the right approach depends on individual financial situations and risk preferences. Clarifying investment goals and adopting a long-term perspective can make U.S. bonds a core component of a stable asset allocation.