Complete Guide to U.S. Bond Investing: A One-Stop Overview from Selection to Yield Calculation

U.S. bonds, as one of the safest investment tools globally, hold significant importance for investors seeking stable returns. This article will provide an in-depth understanding of the operational mechanisms of U.S. government bonds, the characteristics of various bond types, and specific strategies for Taiwanese investors.

Understanding U.S. Government Bonds: The Best Proof of Government Credit

U.S. government bonds (also known as U.S. Treasuries) are debt certificates issued by the U.S. government to the public. The government borrows funds by issuing bonds and commits to repaying principal and interest on time. Due to the U.S. government’s credit rating consistently remaining at the highest level, U.S. bonds have become an essential component of global investment portfolios.

These bonds are popular mainly because they offer reliable cash flow returns and sufficient market liquidity. Both institutional and individual investors regard U.S. government bonds as vital means to hedge risks and protect assets.

The Four Main Types of U.S. Bonds and Their Investment Characteristics

Based on maturity length and nature, U.S. government bonds can be divided into four primary types, each corresponding to different investment horizons and risk preferences:

Short-term Treasury Bills (T-Bills): Quick Return Options

Short-term Treasury Bills, also called U.S. short-term government securities, have maturities of less than one year. These bonds are issued at a discount and are zero-coupon bonds—investors do not receive periodic interest payments but purchase at below face value and redeem at face value upon maturity, with the difference being the return.

Typical issuance periods include 4 weeks, 13 weeks, 26 weeks, and 52 weeks. For example, a 1% interest rate T-Bill might be purchased at $99 for a $100 face value.

Features: Short-term, quick repayment, suitable for investors needing liquidity or seeking stable returns.

Medium-term Treasury Notes (T-Notes): Mainstream Investment Option

Medium-term Treasury Notes (U.S. Treasury notes) have maturities ranging from 2 to 10 years, typically issued in standard terms such as 2, 3, 5, 7, and 10 years. Unlike T-Bills, T-Notes pay interest periodically, usually semiannually.

The 10-year U.S. Treasury note is especially notable as a benchmark for global asset pricing, often called the “anchor of global asset valuation,” and serves as an important indicator of overall bond market trends.

Features: Moderate duration, stable yields, high market recognition, and currently the most popular bond investment choice.

Long-term Bonds (T-Bonds): Commitment to Stable Income

Long-term bonds (U.S. Treasury bonds) have maturities from 10 to 30 years, with the most common being 30 years. They also pay interest semiannually.

Although the duration is relatively long, their liquidity is not as limited as one might think, since they can be freely traded on the secondary market. Investors can adjust their positions at any time based on market conditions.

Features: Long duration, relatively higher yields, suitable for long-term holding and stable cash flow pursuit.

Inflation-Protected Securities (TIPS): Hedge Against Inflation

TIPS’ core mechanism links the principal to inflation. The principal amount is periodically adjusted based on the Consumer Price Index (CPI)—if inflation rises, the principal increases; if deflation occurs, the principal decreases (but at least the original face value is returned at maturity).

Interest is calculated on the adjusted “real principal,” with a fixed rate. When principal increases due to inflation, interest payments also increase proportionally.

Calculation Example: Suppose you buy a TIPS with a face value of $1,000 and a 1% interest rate. If inflation is 5% in that year, the principal adjusts to $1,050, and semiannual interest payment = $1,050 × 1% ÷ 2 = $5.25 (higher than the original $5). At maturity, the government repays the higher of the inflation-adjusted principal or the original face value.

Three Investment Strategies for Taiwanese Investors

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

Method 1: Direct Purchase of Bonds

Purchase of issued bonds through overseas brokers or domestic brokers via secondary market trading. Overseas brokers generally offer more varieties, faster quotes, and lower transaction costs.

Steps:

• Open a securities account on the chosen platform
• Search for bond codes or filter by maturity, yield, etc.
• Place market or limit orders, paying attention to bid-ask spreads and transaction costs (commissions, deposit/withdrawal fees)
• Hold until maturity or sell on the secondary market; interest is paid periodically into the account before maturity

Advantages: Flexible trading, precise allocation as needed.

Disadvantages: Higher entry barriers. Minimum purchase value is typically $1,000 (per bond unit of $100). For example, at a price of $99.128, actual investment is $991.28; additional costs include commissions and market risk.

Method 2: Bond Funds

Bond funds are pooled investment vehicles holding a basket of bonds, effectively diversifying risk. They can be purchased via brokers or fund platforms, with minimums usually around $100.

Advantages: Lower minimum investment, risk diversification.

Disadvantages: Management fees apply, which may be costly for novice investors.

Method 3: Bond ETFs (Recommended)

Bond ETFs trade freely on brokerage platforms like stocks, allowing investors to indirectly hold a portfolio of government bonds. Compared to funds, ETFs have lower transaction costs and are more suitable for small investments. Popular 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

Calculating and Applying U.S. Bond Yields

Actual investor returns are determined by two key indicators: current yield and yield to maturity (YTM).

Current Yield vs. Yield to Maturity

Current yield is a static measure, calculated as:

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

For example, a bond with a face value of $100, a coupon rate of 2%, and a current market price of $98 has a current yield of (100×2%) ÷ 98 × 100% ≈ 2.04%.

Yield to Maturity (YTM) reflects the actual annualized return if the bond is held until maturity, considering interest income, purchase price, face value differences, and all cash flows during the holding period. YTM calculations are more complex, involving present value computations.

Yield Inquiry Methods

Investors do not need to manually calculate YTM; multiple platforms provide real-time data:

• Official Data: The Federal Reserve or U.S. Treasury websites publish daily yield curves
• Market Platforms: Investing.com, CNBC, Wall Street Journal, etc.
• Broker Platforms: Some trading platforms have built-in YTM screening and viewing functions

Key Factors Influencing U.S. Bond Prices

Understanding what affects U.S. bond prices is crucial for investment decisions. Bond prices and yields have an inverse relationship—when prices rise, yields fall, and vice versa.

Internal Factors: Maturity and Coupon Rate

Longer maturities and higher coupon rates are positively correlated. Longer durations entail higher risks, so bonds are issued at lower prices to attract investors and ensure expected yields.

External Factors: Multiple Influences

1. Market Interest Rate Environment

The most direct influence on bond prices. When the central bank raises interest rates, newly issued bonds offer higher coupons, making existing lower-yield bonds less attractive, causing their prices to fall. This explains the significant drop in U.S. Treasury prices and spike in yields over the past two years due to aggressive Federal Reserve rate hikes. Conversely, falling interest rates push bond prices higher.

2. Economic Cycle Fluctuations

The U.S. economic outlook directly impacts bond demand. During recessions, investors tend to seek safety, increasing demand for government bonds and raising their prices; during overheating periods, the opposite occurs.

3. Inflation Expectations

Rising inflation expectations typically lead to higher interest rates, moving in the same direction as bond yields. In high-inflation environments, the real purchasing power of fixed income bonds diminishes, prompting investors to demand higher compensation, which lowers bond prices.

4. Government Bond Supply

Moderate issuance does not disturb the market, but excessive issuance beyond market absorption capacity can disrupt supply and demand balance, leading to falling prices.

Key Events Calendar for the U.S. Bond Market

U.S. Treasury bonds are regularly auctioned and issued. Investors can check the full issuance schedule on the official U.S. Treasury website “Treasury Direct”:

Note: The Treasury Direct platform primarily serves U.S. residents; Taiwanese investors typically trade issued bonds on the secondary market.

Comparing U.S. Bonds with Other Investment Instruments

For investors seeking exposure to the U.S. market, besides purchasing U.S. government bonds, other financial instruments such as CFD-based U.S. stocks or USD investments can be considered:

For beginners, U.S. bonds offer an understandable, risk-controlled investment approach, while CFDs are more suitable for experienced traders with higher risk tolerance.

Investment Tip: The U.S. bond market features high liquidity and transparent pricing mechanisms, but actual yields are influenced by interest rate environments and economic cycles. Before investing, tailor your choice of bond types and investment channels according to your risk appetite, investment horizon, and capital scale.