Complete Guide to U.S. Bond Investment: Understanding Yield Calculations and Taiwan Purchase Options

What Are U.S. Treasury Bonds? Why Are They Worth Watching?

U.S. Treasury Bonds (U.S. Government Bonds) are essentially debt certificates issued by the U.S. government. The government raises funds from investors through these bonds and commits to repaying the principal and interest within a specified period. Due to the highest credit rating of the U.S. government, U.S. bonds are regarded by global investors as one of the lowest-risk investment options. Both institutional and individual investors generally include U.S. bonds in their portfolios as an important part of asset allocation.

The appeal of U.S. bonds lies in their stable cash flow, excellent liquidity, and relatively transparent risk profile. Especially during periods of market volatility, U.S. bonds are often seen as “safe haven” assets.

What Types of U.S. Treasury Bonds Are There? Here’s a Guide to Choosing

Based on maturity periods, U.S. bonds can be divided into four main categories:

Short-term Treasury Bills

Maturity: within 1 year, typically issued at 4, 13, 26, or 52 weeks.

These bonds are issued at a discount, meaning they are sold below face value and redeemed at face value upon maturity, with the difference representing the investment return. For example, a Treasury bill issued at 1% interest might be purchased for $99 with a face value of $100.

Short-term bonds are suitable for investors seeking quick returns and high liquidity, especially when funds need to be available in the short term.

Medium-term Treasury Notes

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

Medium-term bonds pay interest semiannually and are among the most actively traded U.S. bonds. Notably, the 10-year U.S. Treasury note is often called the “global asset pricing benchmark”, serving as an important indicator for the overall bond market.

Long-term Treasury Bonds

Maturity: 10 to 30 years, usually issued with a 30-year term.

Although the maturity is long, these bonds are quite liquid in the secondary market, allowing investors to buy and sell at any time. They also pay interest semiannually.

TIPS (Treasury Inflation-Protected Securities)

These are special government bonds with a core mechanism of principal linked to inflation. The principal amount of TIPS is periodically adjusted based on the Consumer Price Index (CPI)—rising with inflation and decreasing when deflation occurs (but at least returning to the original face value at maturity).

Interest is calculated on the adjusted principal at a fixed rate. For example, a TIPS with a face value of $1,000 and a 1% rate, experiencing 5% inflation in a year, would have its principal adjusted to $1,050, and interest paid would be $10.50.

Comparison Table of Bond Types

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

How Is U.S. Bond Yield Calculated? Let’s Clarify Once and For All

Two Yield Concepts

Current Yield = Annual Interest ÷ Current Price × 100%

This is the most straightforward calculation, reflecting the immediate return based on the current purchase price.

Yield to Maturity (YTM) is the actual annualized return an investor will earn if holding the bond until maturity. YTM calculations are more complex, considering interest income, differences between purchase price and face value, and other factors.

Ways to Check U.S. Bond Yields

You don’t need to manually calculate YTM; you can quickly check through the following channels:

• Official Data: The Federal Reserve or U.S. Department of the Treasury publish daily yield curves on their websites.
• Market Platforms: Financial websites like Investing.com, CNBC, The Wall Street Journal.
• Brokerage Platforms: Many international brokers provide screening tools that display yields for bonds of various maturities.

U.S. Treasury Bond Issuance and Trading Schedule

U.S. bonds are not issued randomly but are auctioned according to a fixed schedule. Knowing the auction timetable helps seize investment opportunities:

Check the latest detailed auction schedule on the TreasuryDirect official website.

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

Option 1: Direct Purchase (Secondary Market)

Buy existing bonds through overseas brokers or domestic custodian banks. Compared to domestic brokers, overseas brokers usually offer more varieties, faster quotes, and lower fees.

Purchase Process:

1. Open a brokerage account
2. Search for bond codes or filter by maturity and yield
3. Place a market or limit order (pay attention to bid-ask spreads and commissions)
4. Receive interest periodically during holding; can sell in the market at any time

Advantages: High liquidity, flexible allocation

Disadvantages: Minimum purchase often starts at $1,000, higher transaction costs, market volatility impact

Option 2: Bond Funds

Invest funds managed by professional fund managers who hold a diversified basket of bonds. This reduces risk. Minimum investment is low (around $100), but management fees apply.

Option 3: Bond ETFs (Recommended)

Bond ETFs trade freely on brokerage platforms like stocks, with much lower transaction costs than funds, making them especially suitable for small investors. Popular U.S. bond ETFs include:

• TLT (Long-term U.S. bonds over 20 years)
• IEF (Intermediate-term 7-10 year bonds)
• SHY (Short-term 1-3 year bonds)
• VGSH (Short-term bond index)
• TIP (TIPS index)
• GOVT (U.S. government bond index)

Comparison of Three Purchase Methods

Key Factors Affecting U.S. Bond Prices and Yields

Bond prices and yields have an inverse relationship: Higher prices mean lower yields; lower prices mean higher yields.

Internal Factors

Maturity and coupon rate directly influence issuance price. Longer-term bonds, with higher risk, are usually issued at lower prices to attract investors.

External Factors

Interest rate environment: When market interest rates rise, newly issued bonds offer higher coupons, making existing bonds less attractive, causing their prices to fall. Conversely, when rates fall, bond prices rise. The recent Fed rate hike cycle exemplifies this logic.

Economic outlook: During recessions, investors tend to flock to safe assets, increasing demand and prices for U.S. bonds.

Inflation: High inflation drives up interest rates, which in turn lowers bond prices. The government may need to lower bond prices to compensate investors for the loss of real purchasing power.

Issuance scale: Excessive bond issuance can disrupt supply and demand balance, leading to falling prices.

Practical Investment Tips for U.S. Treasury Bonds

U.S. bonds are suitable for:

• Long-term investors seeking stable cash flow
• Asset allocation for risk hedging
• Conservative investors with low risk tolerance
• Investors aiming for diversification through bonds

Choose the appropriate bond type based on your investment horizon and risk appetite. Short-term funds can focus on high-yield short-term bonds; long-term assets can consider medium to long-term bonds for stable income.

The U.S. bond yield curve itself is an important economic indicator. Regularly monitoring yield changes helps grasp market trends.