A comprehensive guide to understanding U.S. Treasury bonds: from basic knowledge to yield calculation strategies

Looking to invest in U.S. Treasury bonds in Taiwan but don’t know where to start? This article will guide you through the core concepts of U.S. government bonds, purchasing channels, and how to calculate bond yields, helping you make more informed investment decisions.

What are U.S. Treasury Bonds? Why are they worth paying attention to?

U.S. Treasury bonds (U.S. government bonds) are debt certificates issued by the U.S. government, essentially a promise to borrow from the public, with a set schedule to return principal and interest. Due to the top-tier credit rating of the U.S. government, U.S. Treasury bonds are recognized as one of the safest investment tools worldwide, offering stable cash flow and good liquidity, thus widely held by domestic and international institutions and individual investors.

What types of U.S. Treasury bonds are there? How to choose?

U.S. Treasury bonds are divided into three main categories based on maturity, each with its own characteristics:

Short-term Treasury Bills (T-Bills)

Maturity features: Less than 1 year, typically issued with 4-week, 13-week, 26-week, or 52-week terms.

Interest payment: Zero-coupon bonds issued at a discount. Investors buy at below face value, and at maturity, receive face value; the difference is the return. For example, a short-term Treasury bill issued at 1% interest, purchased at $99 for a $100 face value.

Suitable for: Investors seeking quick liquidity and short-term gains.

Medium-term Treasury Notes (T-Notes)

Maturity features: 2 to 10 years, common maturities are 2, 3, 5, 7, 10 years.

Interest payment: Paid semiannually.

Market position: The 10-year U.S. Treasury note is known as the “anchor of global asset pricing” and an important reference for bond market observers.

Suitable for: Medium-term investors seeking stable cash flow.

Long-term Treasury Bonds (T-Bonds)

Maturity features: 10 to 30 years, mainly issued with 30-year maturities.

Interest payment: Paid semiannually.

Liquidity features: Despite the long duration, liquidity in the secondary market is not as poor as one might think; they can be bought and sold at any time.

Suitable for: Long-term investors focusing on stable income.

TIPS (Treasury Inflation-Protected Securities)

Core mechanism: Principal linked to the Consumer Price Index (CPI), adjusted periodically. If inflation rises, principal increases; if deflation occurs, principal decreases but not below the original face value.

Interest calculation: Based on the adjusted principal, with a fixed rate. When principal increases, interest payments also increase.

Example: Buying a TIPS with a face value of $1,000 and a 1% rate; if the annual inflation rate reaches 5%, the principal adjusts to $1,050, and interest payments become $10.50 (higher than the original $10). At maturity, you receive the higher of the adjusted principal or the original face value.

Bond Yield Calculation: Core Concepts and Practical Applications

What is yield?

The yield of government bonds reflects the investment return, mainly divided into two types:

Current Yield

Calculation formula: Annual interest ÷ Current price × 100%

This is the simplest way to express yield, considering only periodic interest payments.

Yield to Maturity (YTM)

This is the actual annualized return an investor will receive if holding the bond until maturity, involving more complex calculations that consider:

• Periodic interest income
• Principal gains or losses at maturity
• Compound interest effects

YTM involves solving multiple variables and is cumbersome to calculate manually, but in practice, investors usually rely on financial tools or platforms.

How to check real-time bond yields?

• Official data: The Federal Reserve or U.S. Department of the Treasury publish daily yield curves.
• Market platforms: Investing.com, CNBC, WSJ, etc., provide real-time quotes.
• Broker platforms: Many brokers offering trading services allow filtering specific government bonds and viewing YTM data.

Practical significance of yield calculation

Understanding yield calculations helps you:

• Assess the relative attractiveness of bonds with different maturities
• Predict bond market trends and price movements
• Optimize your investment portfolio allocation decisions

How to buy U.S. Treasury bonds in Taiwan? Three main channels explained

Method 1: Direct purchase of bonds

Process:

• Use overseas brokers or domestic brokers to entrust the purchase of issued bonds (secondary market trading)
• Search by bond code or use screening tools based on maturity, yield, etc.
• Place orders at market price or limit price, paying attention to bid-ask spreads and transaction fees
• Interest is paid periodically into your account, and you can sell in the secondary market at any time

Advantages: High liquidity, flexible allocation.

Disadvantages: Higher entry barrier, minimum purchase usually $1,000; involves commissions and fees; prices fluctuate with market conditions.

Method 2: Bond funds

Bond funds pool multiple bonds into a diversified investment basket, reducing risk associated with individual bonds. Can be purchased via brokers or fund platforms, with a lower minimum (around $100), but management fees apply.

Suitable for: Investors with some risk tolerance seeking diversification.

Method 3: Bond ETFs

Bond ETFs trade like stocks on brokerage platforms, allowing investors to indirectly hold a portfolio of government bonds. They have lower transaction costs than mutual funds and are suitable for small investments. Common U.S. Treasury bond ETFs include:

• TLT (iShares 20+ Year Treasury Bond ETF)
• IEF (iShares 7-10 Year Treasury Bond ETF)
• SHY (iShares 1-3 Year Treasury Bond ETF)
• VGSH (Vanguard Short-Term Treasury ETF)
• TIP (iShares TIPS Bond ETF)
• GOVT (iShares U.S. Treasury Bond ETF)

Factors influencing U.S. Treasury bond prices

Since the cash flows at maturity are fixed, there is a fundamental rule: the higher the price, the lower the potential yield; the lower the price, the higher the potential yield. This causes inverse movement between bond prices and yields.

Internal factors

Maturity and coupon rate

Longer maturity and higher coupon rates tend to move together. Longer durations carry more risk, often leading to lower issuance prices to attract investors, affecting the initial price.

External factors

1. Interest rate environment

Current interest rates are a key factor affecting bond prices. When rates rise, newly issued bonds offer higher coupons, making existing bonds less attractive, causing their prices to fall; when rates fall, existing bonds become more attractive, pushing prices up. The Fed’s recent rate hikes have caused bond prices to drop sharply and yields to spike.

2. Economic outlook

During economic downturns, market interest rates tend to decline, capital flows into bonds for safety, raising bond prices; during economic booms, the opposite occurs.

3. Inflation

Rising inflation usually accompanies high interest rate environments. If inflation exceeds bond interest, real returns become negative, leading to falling bond prices. Conversely, falling inflation supports price recovery.

4. Supply issuance

Moderate issuance of government bonds generally does not disturb the market, but excessive issuance can disrupt supply and demand, leading to oversupply and falling prices.

Risks and returns balance in U.S. Treasury investment

Although U.S. government bonds are considered safe assets, investors should understand their risk characteristics. Interest rate risk, inflation risk, liquidity risk all need to be considered. Different maturities and types of bonds offer various combinations of yield and risk, so choose according to your investment horizon and risk tolerance.

By properly understanding bond yield calculation methods, investors can more scientifically evaluate the value of government bond investments and develop more appropriate asset allocation strategies.