Want to invest in U.S. Treasury bonds? A guide to how to buy government bonds and how to calculate returns

U.S. Treasuries, as one of the safest investment tools globally, attract countless investors’ attention. However, for novice investors entering the market, questions about how to buy government bonds, how to choose them, and how to calculate returns are often confusing. Today, we will delve into a comprehensive guide to investing in U.S. Treasuries.

Understanding U.S. Treasuries

U.S. Treasuries (U.S. government bonds) are essentially a way for the government to raise funds from the public. The U.S. government borrows money by issuing bonds and commits to returning the principal and paying interest at maturity. Because of the high credit rating of the U.S. government, these bonds are regarded by global investors as highly liquid, low-risk asset allocations.

Whether individual or institutional investors, U.S. Treasuries have become an important part of investment portfolios, used to balance risk and obtain stable returns.

Main Types and Features of Government Bonds

U.S. Treasuries are classified into four main categories based on maturity, each with different characteristics:

Short-term Treasury Bills

Short-term Treasury bills mature within one year, typically issued with 4-week, 13-week, 26-week, or 52-week cycles.

These bonds are issued at a discount and pay face value at maturity. Investors do not receive periodic interest; instead, they purchase at a discounted price below face value and receive the full face value at maturity. For example, a short-term Treasury bill issued at a 1% discount, purchased for $99, will yield $1 profit at maturity on a $100 face value.

Due to their short duration and quick turnover, short-term Treasury bills are very suitable for investors seeking flexible allocation.

Medium-term Treasury Notes

Medium-term Treasury notes have maturities ranging from 2 to 10 years, with common issuance periods of 2, 3, 5, 7, and 10 years.

These bonds pay interest semiannually. The 10-year Treasury note is considered a “global asset pricing anchor” and an important reference for analyzing bond market trends.

Long-term Treasury Bonds

Long-term Treasury bonds have the longest maturities, typically from 10 to 30 years, mainly issued in 30-year terms.

They also use a semiannual interest payment mechanism. Although the duration is long, their liquidity is actually stronger than expected because they can be freely traded on the secondary market.

TIPS (Treasury Inflation-Protected Securities)

The core advantage of TIPS is the principal’s linkage to inflation. The bond’s principal is periodically adjusted based on the Consumer Price Index (CPI).

When inflation rises, the principal value increases, and interest payments also rise accordingly; if deflation occurs, the principal is adjusted downward, but the government guarantees to return at least the original face value at maturity.

For example, purchasing a $1,000 face value TIPS with a fixed 1% interest rate, if inflation reaches 5% that year, the principal will be adjusted to $1,050, and the annual interest will be $10.50 (higher than the original $10).

Comparison Table of Bond Types

Generally, long-term bonds offer higher yields than short-term bonds. However, recent Federal Reserve rate hikes have caused short-term interest rates to soar, leading to an inverted yield curve, breaking the traditional yield hierarchy.

Issuance and Auction Mechanisms

U.S. Treasuries are issued through regular auctions. Investors can check the auction schedule via official channels of the U.S. Department of the Treasury.

Different types of bonds have different auction frequencies. For example, 13-week and 26-week Treasury bills are auctioned weekly, while 10-year Treasury notes are auctioned in specific months (February, May, August, November).

How to Invest in U.S. Treasuries in Taiwan

For Taiwanese investors, there are mainly three ways to purchase U.S. Treasuries, each with its advantages and disadvantages:

Option 1: Direct Purchase of Bonds

Buy existing government bonds on the secondary market through domestic or foreign brokers. Overseas brokers generally offer a wider variety, more timely quotes, and lower fees compared to domestic custodians.

Transaction process includes:

• Opening a securities account with a broker
• Screening bonds based on maturity, yield, etc.
• Placing market or limit orders
• Receiving periodic interest payments after purchase, with the ability to resell on the secondary market at any time

Advantages: Sufficient liquidity, flexible allocation.

Disadvantages: Higher initial investment (usually over $1,000), transaction commissions, and price fluctuation risks.

Option 2: Bond Funds

Bond funds pool various bonds together, reducing risk associated with investing in a single bond. The minimum investment is relatively low, around $100, but management fees are charged.

Option 3: Bond ETFs (Most suitable for small investors)

Bond ETFs trade freely on trading platforms like stocks, allowing investors to indirectly hold a portfolio of bonds. Their transaction costs are much lower than traditional bond funds, making them more suitable for small-scale participation.

Common U.S. Treasury bond ETFs include:

• TLT (Long-term bonds over 20 years)
• IEF (Intermediate-term bonds 7–10 years)
• SHY (Short-term bonds 1–3 years)
• VGSH (Short-term bond index fund)
• TIP (Inflation-protected bonds)
• GOVT (U.S. Treasury aggregate index)

Comparison of the Three Investment Methods

U.S. Treasury Yield: Concepts and Calculation

Investors often encounter two key concepts when buying Treasuries: Current Yield and Yield to Maturity (YTM).

Current Yield

The most straightforward calculation is:

Current Yield = Annual Interest ÷ Current Price × 100%

This reflects the immediate return based on the current market price.

Yield to Maturity (YTM)

YTM is the actual annualized return an investor can expect if holding the bond until maturity. Its calculation is more complex, considering interest income, principal gains or losses, and the time value of money.

Fortunately, investors do not need to perform manual calculations. Official agencies like the Federal Reserve and the U.S. Department of the Treasury publish daily yield curves, and financial news websites (e.g., Investing.com, CNBC) and major trading platforms provide real-time YTM data for easy access.

Key Factors Affecting U.S. Treasury Prices

Like other bonds, Treasury prices and yields have an inverse relationship: higher prices mean lower yields, and vice versa.

Understanding what influences Treasury prices is crucial for investment decisions:

Internal Factors

Maturity and Coupon Rate: Longer-maturity bonds carry higher potential risks and are issued at relatively lower prices to attract investors.

External Factors

Interest Rate Environment Changes: When the Federal Reserve raises interest rates, newly issued bonds offer higher coupon rates, reducing the attractiveness of existing bonds and causing their prices to fall. Conversely, when rates fall, bond prices rise. The aggressive rate hikes by the Fed over the past two years have led to significant declines in bond prices and soaring yields.

Economic Cycles: During recessions, market interest rates tend to decline, capital flowing into bonds pushes prices up; during economic booms, the opposite occurs.

Inflation Expectations: Rising inflation pushes up interest rates. Investors worry that bond interest payments may not keep pace with declining purchasing power, demanding lower bond prices to compensate for risk premiums.

Issuance Scale: Excessive bond issuance can disrupt market supply and demand balance, putting downward pressure on prices.

U.S. Treasuries vs. Other Investment Tools

If you are considering entering the U.S. market, besides traditional Treasuries, other options are worth noting.

Different investment tools have distinct characteristics: Treasuries have higher transaction costs but are extremely low risk, suitable for conservative investors; other financial instruments offer more trading options and potential returns but come with higher risks.

Investors with different risk tolerances and goals can find suitable allocations. The core of “how to buy U.S. Treasuries” is choosing the right tools and methods based on individual circumstances.

Whether you are a conservative investor seeking stable cash flow or an institutional investor aiming for diversified asset allocation, U.S. Treasuries are a valuable option to consider seriously for your portfolio.