Government Bond Investment Guide: Classification, Yield Calculation, and Allocation Strategies Full Analysis

Basic Understanding of Government Bonds

Government bonds (also called national debt) are debt instruments issued by the government, representing the government’s financing from society, with a promise to pay principal and interest within a specified period. Due to the highest credit rating, government bonds are recognized as one of the safest investment options worldwide. Their stable income streams and ample liquidity features make them an important component of many international investors’ asset allocations.

The Four Main Types of Government Bonds

Based on maturity periods, government bonds are mainly divided into four categories:

Short-term Bonds (Treasury Bills, T-Bills)

• Maturity: Less than 1 year
• Issuance cycles: 4-week, 13-week, 26-week, 52-week, etc.
• Features: Zero-coupon format, issued at a discount, redeemed at face value at maturity
• Suitable for: Short-term investors seeking high liquidity

Medium-term Bonds (Treasury Notes, T-Notes)

• Maturity: 2 to 10 years
• Common maturities: 2, 3, 5, 7, 10 years
• Interest payments: Paid semiannually
• Status: Currently the most mainstream type of government bond
• Note: The 10-year bond is called the “anchor of global asset pricing” and an important indicator for bond markets

Long-term Bonds (Treasury Bonds, T-Bonds)

• Maturity: 10 to 30 years, usually issued for 30 years
• Interest payments: Paid semiannually
• Liquidity: Although with longer maturity, actively traded in secondary markets, so liquidity is actually good

Inflation-Protected Securities (TIPS)

• Core mechanism: Principal linked to Consumer Price Index (CPI)
• Operation: When inflation rises, principal increases; during deflation, principal decreases (but at least returns the original face value at maturity)
• Interest calculation: Based on adjusted principal, fixed rate
• Suitable for: Investors seeking to hedge against inflation risk

Yield Analysis of Government Bonds

Two Forms of Yield

Current Yield = Annual interest payment ÷ Current bond price × 100%

This is the most direct measure of return, reflecting the annualized return if you buy the bond now.

Yield to Maturity (YTM) is more complex; it represents the actual annualized return an investor will earn if holding the bond until maturity, considering interest income and principal gains or losses. This value fluctuates with bond prices.

Practical Calculation Example

Taking TIPS as an example, if you buy a bond with a face value of $1,000 and an annual interest rate of 1%:

If inflation reaches 5% in a year, the principal adjusts to $1,050, and the corresponding interest payment = $1,050 × 1% = $10.50 (higher than the original $10). At maturity, the government repays the inflation-adjusted principal or the original face value, whichever is higher.

Yield Query Channels

• Official data: Published daily by the Federal Reserve or U.S. Department of the Treasury
• Market platforms: Investing.com, CNBC, The Wall Street Journal, etc.
• Brokerage platforms: Many trading platforms offer YTM filtering and inquiry functions

Relationship Between Government Bond Prices and Yields

Since the cash flows of bonds are fixed, bond prices and yields have an inverse relationship—higher prices mean lower yields, and vice versa. This characteristic determines the profound impact of interest rate environments on the bond market.

Core Factors Affecting Government Bonds

Internal Factors:

• Maturity and coupon rate

Longer maturity bonds face more potential risks, so they must be issued at lower prices to compensate investors, directly affecting issuance prices.

External Factors:

1. Interest Rate Environment - When market interest rates rise, newly issued bonds have more attractive coupons, causing existing bonds’ prices to fall; when rates fall, the opposite occurs. For example, during recent Fed rate hikes, existing bond prices declined, and yields increased significantly.

2. Economic Cycle - During recessions, market interest rates tend to decrease, capital flows into safe assets (government bonds), pushing prices up; during economic booms, the opposite occurs.

3. Inflation Expectations - High inflation expectations push up overall interest rates, making fixed-income bonds less attractive, leading to falling prices; low inflation benefits bond prices.

4. Issuance Scale - Excessive bond supply can disrupt market supply and demand balance, causing downward pressure on prices.

Three Ways to Purchase Government Bonds in the Market

Method 1: Direct Purchase of Bonds

Buy existing bonds through overseas or domestic brokers via secondary market.

Process: Open a securities account → Search for bond code or use screening tools to select maturity and yield → Place market or limit order → Hold or trade

Advantages: High liquidity, flexible allocation

Disadvantages: High initial capital requirement (usually starting from $1,000), possible higher transaction costs, prices affected by market fluctuations

Method 2: Bond Funds

Bond funds bundle multiple bonds into a diversified portfolio, reducing individual bond risk.

Features: Lower minimum investment (generally from $100), risk diversification, but management fees apply

Method 3: Bond ETFs

Exchange-Traded Funds that can be bought and sold freely on brokerage platforms similar to stocks.

Advantages: Lower trading costs than bond funds, suitable for small investments, high liquidity

Common Government Bond ETFs:

• 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

Government Bond Issuance Schedule

Government bonds are regularly auctioned; investors can participate according to the following cycles:

• Short-term Bonds: Multiple issuances weekly, depending on the maturity (4, 13, 26, 52 weeks)
• Medium-term Bonds: Monthly issuance for 2, 3, 5, 7-year maturities; 10-year bonds issued in Feb, May, Aug, Nov
• Long-term Bonds: 20-year bonds issued in Jan, Mar, Apr, Jun, Jul, Sep, Oct, Dec; 30-year bonds in Feb
• TIPS: 5-year in Apr, Oct; 10-year in Jan, Jul; 30-year in Feb

Summary and Allocation Recommendations

As a low-risk, stable-yield investment tool, government bonds are suitable for investors with different time horizons:

• Short-term allocation: Choose short-term bonds or short-term ETFs like SHY for quick gains and easy adjustment
• Medium-term holding: Medium-term bonds or IEF offer balanced risk-return
• Long-term layout: Long-term bonds are suitable for retirement funds and long-term capital; long-term ETFs like TLT provide flexible adjustments
• Inflation hedge: TIPS or TIP ETFs can effectively protect purchasing power

The key is to select appropriate government bond types and purchase methods based on individual investment horizon, risk appetite, and liquidity needs.