The Complete Guide to Investment Strategies that Maximize Profits with US Treasury Yields

As global financial markets experience volatility these days, the need for stable asset allocation is increasingly emphasized. In particular, U.S. Treasury Bonds backed by the U.S. government are regarded as the most trusted safe assets in the world financial markets. Despite their low nominal interest rates, they attract the interest of many individual and institutional investors due to their high liquidity and predictable return structure. This document provides a comprehensive overview of the U.S. Treasury yield mechanism, investment approaches, and especially optimized strategies that Korean investors can utilize.

Basic Structure and Market Role of U.S. Treasury Securities

Treasury securities are debt certificates issued by the government to cover the shortfall in national operating funds. The government promises to pay periodic interest and repay the principal at maturity in exchange for borrowing funds. The U.S. Treasury market is the largest bond market in the world, with the 10-year Treasury note serving as a global benchmark for interest rates.

U.S. Treasury yields reflect more than just investment returns; they are key indicators that mirror the macroeconomic health of the global economy. The level and shape of the yield curve are determined by economic conditions and have broad impacts on the pricing of various financial products.

Three Types of U.S. Treasury Securities

T-bill( Short-term securities, maturities under 1 year)

Minimized risk exposure and excellent liquidity. They can be quickly liquidated when funds are needed, making them popular among conservative investors.

T-note( Medium-term securities, maturities from 1 to 10 years)

Suitable for investors planning medium-term finances, offering balanced yields between T-bills and T-bonds. Used in portfolio construction considering economic cycle phases.

T-bond( Long-term securities, maturities from 10 to 30 years)

Long-term products with fixed interest rates, ideal for investors seeking long-term asset preservation. Typically, longer maturities offer higher yields.

Dynamics Between U.S. Treasury Yields and Bond Returns

Inverse relationship between interest rates and prices

U.S. Treasury yields and bond prices move inversely. When demand for safe assets increases, bond prices rise and yields fall. Conversely, when risk appetite increases, bond demand decreases, prices drop, and yields rise. Understanding this mechanism is crucial for timing investments.

Interest rate environment and economic signals

When long-term yields fall below short-term yields, creating an inverted yield curve, it signals a potential recession. Many investors flock to long-term bonds in anticipation of economic downturns. Conversely, a normal yield curve indicates expectations of economic growth.

Key Advantages of Investing in U.S. Treasury Securities

Highest creditworthiness and safety

The U.S. government’s repayment ability and commitment are unquestioned. U.S. Treasuries are regarded as risk-free assets worldwide, allowing investors to hold them with confidence even during economic crises.

Regular cash flow

Fixed interest rates are established at issuance, with interest typically paid semiannually. Ideal for retirees or investors needing stable income streams.

Excellent market liquidity

U.S. Treasuries are actively traded throughout the year. They can be quickly sold when needed without waiting for maturity, facilitating portfolio rebalancing.

Tax benefits

While federal taxes apply, state and local taxes are exempt. These tax advantages can significantly improve net returns.

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

( Interest rate risk When U.S. Treasury yields rise, the value of existing bonds declines. Selling before maturity in a rising rate environment may incur losses. Shorter-duration securities are less affected than longer-term bonds during rate hikes.

) Inflation erosion Fixed-rate bonds do not track inflation. If inflation exceeds bond yields, real returns can turn negative. Inflation-linked securities like TIPS can mitigate this risk.

( Currency exchange risk Foreign investors face currency risk. When the dollar weakens, converted returns in local currency decrease, and prolonged holding can lead to accumulated exchange losses.

) Credit risk### Theoretical level### While the likelihood of the U.S. government defaulting is extremely low, it remains a theoretical possibility under extreme political or economic circumstances. Considering the high credit rating, this risk is generally negligible.

How to Invest in U.S. Treasury Securities

( Method 1: Direct Purchase)TreasuryDirect###

Advantages:

• Purchase directly from the U.S. Treasury via TreasuryDirect website
• No intermediary fees
• Full control over bond selection and management
• Receive interest and principal at maturity

Disadvantages:

• Limit of $10,000 per transaction
• Managing multiple bonds for diversification increases complexity
• Potential losses if selling before maturity during rising rate periods

Suitable for: Conservative individual investors seeking long-term stability and willing to manage their holdings directly, such as retirees.

Method 2: Bond Mutual Funds

Advantages:

• Active management by professional fund managers
• Diversification with small amounts across various bonds
• Reduced risk from individual bond holdings

Disadvantages:

• Management fees reduce net returns
• Loss of direct control over individual bonds
• Limited flexibility in fund composition and operation

Suitable for: Investors who prefer diversification, trust market professionals, and want to avoid managing individual bonds.

( Method 3: Bond Index Funds)ETFs###

Advantages:

• Low management costs(Passive management)
• Trade freely on stock exchanges like stocks
• Transparent index tracking for predictable performance

Disadvantages:

• Affected by stock price volatility
• Tracking errors###Tracking error### may occur
• Cannot actively adjust holdings based on market changes

Suitable for: Passive investors aiming for cost-effective, systematic investment aligned with index returns.

Portfolio Strategies Combining Korean and U.S. Treasury Securities

( Synergistic effects of combining Korean and U.S. Treasuries

Investing simultaneously in Korean and U.S. Treasuries offers several benefits. Regional diversification can mitigate impacts from specific country economic shocks, and holding dual currencies (KRW and USD) provides currency risk hedging. The economic cycles of the two countries may differ, allowing one market’s weakness to be offset by the other’s strength.

) Currency risk management strategies

A primary concern for Korean investors is currency fluctuation risk, separate from U.S. Treasury yield returns. Hedging via forward contracts can lock in exchange rates but sacrifices potential gains from favorable currency movements. A strategic approach is to hedge about 50% of the investment amount, leaving the rest unhedged. When the dollar appreciates, unhedged portions can generate additional returns; when it depreciates, hedged parts help offset losses.

( Duration strategy

Duration)Average time to maturity( indicates sensitivity to interest rate changes. For stable income, longer-duration U.S. Treasuries can be included, but if concerned about rising rates, shortening duration can reduce risk.

) Tax considerations

Korean investors should be aware that interest income from U.S. Treasuries may be subject to both U.S. federal tax and Korean taxes. Fortunately, the Korea-U.S. Double Taxation Agreement###DTA### helps prevent double taxation, and consulting tax professionals is recommended to optimize tax efficiency.

Example Portfolio Construction

Consider a balanced portfolio with 50% Korean Treasuries and 50% U.S. Treasuries. This setup aims to generate stable income while preserving principal.

Regional diversification reduces the impact of economic shocks in a single country. Holding both KRW and USD assets also lowers overall portfolio volatility due to currency fluctuations.

In periods of a strong dollar, unhedged U.S. Treasuries can provide attractive KRW-denominated returns. Conversely, when the dollar weakens, hedged portions help mitigate currency losses.

Conclusion

U.S. Treasury yields are more than just investment returns; they are key indicators for understanding global economic trends. Individual investors should thoroughly understand risks related to interest rates, inflation, and exchange rates when investing in U.S. Treasuries.

Especially for Korean investors, combining U.S. Treasuries with Korean bonds can enhance diversification and income stability. Choosing among direct purchase, funds, ETFs, and other investment vehicles should be based on personal circumstances, risk tolerance, and investment horizon.

U.S. Treasuries are more suitable for investors prioritizing long-term asset preservation and stable cash flows rather than short-term high yields.