Taiwan's Complete Guide to Investing in U.S. Treasury Bonds: From Beginner to Expert

What are U.S. Treasury Bonds? Why Invest?

U.S. Treasury Bonds are debt instruments issued by the U.S. government that essentially represent a loan from investors to the U.S. government. The government commits to paying fixed interest over a specified period and returning the principal at maturity.

Due to the highest credit rating globally, U.S. Treasury Bonds are widely recognized as one of the safest investment assets worldwide. Compared to stocks’ high volatility, bonds offer stable cash flow and predictable returns, making them an important component of many investors’ asset allocation. Whether individual investors, institutional entities, or central banks of various countries, all use U.S. Treasury Bonds as hedging tools and sources of income.

What Types of U.S. Treasury Bonds Are There?

U.S. Treasury Bonds are categorized into four main types based on maturity periods, each with its own characteristics, suitable for different investment needs:

Short-term Treasury Bills (T-Bills)

Maturity features: Maturities within 1 year, commonly 4 weeks, 13 weeks, 26 weeks, and 52 weeks.

Short-term T-Bills are issued at a discount and do not pay interest. For example, a $100 face value, 1% interest rate T-Bill might be purchased at $99, and at maturity, redeemed at face value, earning the difference as profit.

This design makes short-term T-Bills the preferred choice for investors with high liquidity needs and short investment horizons. Funds can be recovered in a relatively short period, suitable for medium to short-term capital allocation.

Medium-term Treasury Notes (T-Notes)

Maturity features: Maturities from 2 to 10 years, typically issued at 2, 3, 5, 7, and 10 years.

T-Notes pay interest semi-annually and are currently the most popular type of Treasury bonds. The 10-year U.S. Treasury note is widely used and is regarded as the “global asset pricing anchor,” with market participants often referencing its yield to assess overall bond market conditions and economic expectations.

Medium-term bonds strike a good balance between duration and yield, avoiding the low returns of very short-term bonds and the higher risks of long-term bonds.

Long-term Treasury Bonds (T-Bonds)

Maturity features: 20 to 30 years, most commonly 30 years.

Long-term T-Bonds also pay interest semi-annually. Despite longer maturities, they are actively traded in the secondary market, and liquidity is not as poor as one might think. Investors can adjust their positions flexibly based on market conditions.

Long-term bonds are suitable for investors seeking stable long-term income, especially for retirement planning and long-term asset allocation.

Treasury Inflation-Protected Securities (TIPS)

TIPS are innovative because the principal is linked to inflation. The bond’s principal adjusts periodically based on the Consumer Price Index (CPI):

• When inflation rises, the principal increases
• During deflation (price decline), the principal decreases, but at least the original face value is returned at maturity

Interest is calculated on the adjusted principal, with a fixed rate. Therefore, when inflation increases the principal, interest payments also increase.

Example: Suppose you buy a $1,000 face value TIPS with a 1% interest rate. If inflation is 5% that year, the principal adjusts to $1,050, and interest income becomes $1,050 × 1% = $10.50 (originally $10). At maturity, the government repays the higher of the adjusted principal or the original face value.

Comparison table of bond types

Generally, long-term bonds have higher yields than short-term bonds. However, recent Federal Reserve rate hikes have caused short-term yields to surpass long-term yields, resulting in an inverted yield curve.

How Can Taiwanese Investors Purchase U.S. Treasury Bonds?

There are three main ways for investors in Taiwan to buy U.S. Treasury Bonds, each with advantages and disadvantages.

( Method 1: Direct Purchase of Bonds

Buy existing bonds on the secondary market through overseas or domestic brokers. Compared to domestic brokers, overseas brokers usually offer a wider variety of bonds, faster quotes, and lower transaction costs.

Purchase process:

• Open a securities account with a broker and complete identity verification
• Search for specific bond codes or use filtering tools to select desired maturities and yields
• Place market or limit orders, paying attention to bid-ask spreads and transaction fees
• After purchase, bonds can be held to maturity for periodic interest payments or traded freely in the secondary market

Advantages: High liquidity, flexible allocation, direct access to bond information.

Disadvantages: Higher initial investment threshold (usually a minimum of $1,000), transaction commissions, and market price fluctuation risks.

) Method 2: Bond Funds

Bond funds pool various bonds into a single investment product. Investors hold a basket of bonds rather than a single bond, effectively reducing risk.

Available through brokers or fund platforms, with a lower minimum investment (often starting at $100), but management fees apply. For novice investors, this is an intermediate option between direct purchase and ETFs.

( Method 3: Bond ETFs (Recommended for Beginners)

Bond ETFs are fund products traded freely on brokerage platforms like stocks. Investors indirectly hold a portfolio of government bonds, with much lower transaction costs than bond funds, making them suitable for small investments.

Common U.S. Treasury Bond ETFs include:

• TLT (iShares 20+ Year Treasury Bond ETF) – Long-term bonds
• IEF (iShares 7-10 Year Treasury Bond ETF) – Medium-term bonds
• SHY (iShares 1-3 Year Treasury Bond ETF) – Short-term bonds
• VGSH (Vanguard Short-Term Treasury ETF) – Short-term bonds
• TIP (iShares TIPS Bond ETF) – Inflation-protected bonds
• GOVT (iShares U.S. Treasury Bond ETF) – Aggregate government bonds

Comparison of three purchase methods

How Is the Yield of U.S. Treasury Bonds Calculated?

There are two main indicators for U.S. Treasury Bond yields:

) Current Yield

The simplest calculation:

Current Yield = Annual Interest Payment ÷ Current Market Price × 100%

For example, a bond with a $100 face value, paying $3 annually, priced at $98, has a current yield of 3 ÷ 98 × 100% = 3.06%.

( Yield to Maturity (YTM)

This reflects the actual annualized return if the bond is held until maturity, considering purchase price, coupon rate, payment timings, and principal repayment. YTM calculations are complex, but investors do not need to do them manually. Many platforms provide real-time YTM data.

Official data sources

• Federal Reserve (U.S. Federal Reserve)
• U.S. Department of the Treasury

Market information platforms

• Investing.com
• CNBC
• WSJ (Wall Street Journal)

Broker trading platforms Many brokers allow direct filtering and viewing of specific bond YTM data.

Factors Affecting U.S. Treasury Bond Prices

Bonds have an interesting characteristic: price and yield are inversely related. When prices go up, yields go down; when prices fall, yields rise. This is because the fixed future cash flows mean that price fluctuations directly impact the actual return.

U.S. Treasury Bond prices are influenced by:

) Internal factors: Maturity and coupon rate

Longer maturities carry higher risks, so to attract investors, they are issued at lower prices to compensate for increased uncertainty. Coupon rates directly determine periodic interest payments.

( External factors

1. Market interest rate environment

When current interest rates are higher than a bond’s coupon rate, older bonds with lower yields become less attractive, causing their prices to fall. Conversely, when rates decline, older bonds with higher yields appreciate.

Recent aggressive rate hikes by the Fed have caused market interest rates to soar, leading to significant declines in existing bond prices and rising yields.

2. Economic cycle

During recessions, market interest rates tend to fall, and risk-averse capital flows into government bonds, pushing prices up. During economic booms, the opposite occurs.

3. Inflation expectations

Rising inflation expectations lead to higher interest rates, negatively impacting bond prices. Investors demand higher yields to compensate for inflation loss. When inflation expectations decrease, bond prices tend to rise.

4. Supply and demand

Moderate issuance of government bonds increases the supply of financial assets without overburdening the market. Excessive issuance beyond market capacity causes oversupply, disrupting supply-demand balance and leading to falling prices.

U.S. Treasury Bond Auction Schedule

U.S. Treasury Bonds are issued through regular auctions. Investors can check upcoming auction schedules on the official TreasuryDirect website.

Bond auction frequency table

Tips for Taiwanese Investors

U.S. Treasury Bonds offer safety and liquidity for Taiwanese investors. When choosing, consider your investment horizon, risk tolerance, and capital size.

Beginners can start with bond ETFs to gain experience, then gradually explore direct bond purchases. During rising inflation expectations, adding TIPS is advisable. For long-term planning, regularly review the yield curve and adjust asset allocation accordingly.

Investing in U.S. Treasury Bonds is an essential part of building a balanced portfolio, providing hedging against stock market volatility and offering stable cash flow. Understanding market dynamics is crucial for making informed investment decisions in the evolving global interest rate environment.