Why US bond yields are currently attracting attention: The ultimate beginner's guide for Korean investors

Recently, individual investors seeking stable asset allocations are increasing in a global interest rate hike environment. In particular, U.S. Treasury Bonds are regarded as the safest assets backed by the credit of the world’s strongest economy. Although interest rates are low, they are attractive because they can be liquidated at any time and offer regular interest income. In this article, we will comprehensively cover the structure of U.S. bond yields, actual investment methods, and tailored strategies for Korean investors.

Things to Know First: Basic Bond Mechanics

A bond is essentially a ‘loan agreement.’ When the government or a corporation needs funds, they borrow money from investors and return the principal at a set maturity, paying periodic( usually every 6 months) interest.

The U.S. government operates similarly. When it lacks funds for national operations, it issues Treasury securities to raise capital from domestic and international investors. The most traded product in the bond market is the 10-year Treasury, mainly traded for yield generation rather than long-term holding.

How do the different types of U.S. Treasury securities differ?

U.S. Treasury securities are issued by the U.S. Department of the Treasury and are categorized into three types based on maturity.

T-bill(Short-term securities): Maturities under 1 year, with almost no risk and very high liquidity. Favorable for investors needing short-term cash management.

T-note(Medium-term securities): Maturities from 1 to 10 years, targeting medium-term returns. One of the most popular products.

T-Bond(Long-term securities): Maturities from 10 to 30 years, offering fixed interest rates. Chosen by investors seeking long-term stable income.

During economic downturns, these bonds serve as a ‘shield’ in portfolios, and U.S. bond yields function as benchmark indicators in global financial markets.

Distinguishing Between Interest Rates and Yields

An important concept here is that interest rate(nominal rate) and yield(return) are different.

The yield is the interest income earned divided by the purchase price of the bond. Since bond prices fluctuate in real-time based on demand, they can differ from the original issue price.

A paradoxical phenomenon occurs:

• When demand for safe assets increases → bond prices rise → yields fall
• When bond demand decreases → bond prices fall → yields rise

Ultimately, bond prices and interest rates move inversely, reflecting investor sentiment. In the term structure, when the economy is unstable, long-term bond demand surges, causing long-term yields to fall below short-term yields, creating an inverted yield curve.

Four Core Strengths of Investing in U.S. Treasuries

( 1. Top-tier safety The U.S. government’s credit rating is the highest globally. During crises, the U.S. prioritizes Treasury repayment, making default virtually impossible.

) 2. Stable and predictable returns Fixed interest rates at issuance remain until maturity. Receiving interest every six months makes them ideal for retirees needing regular income.

3. Excellent liquidity

U.S. Treasuries are among the most actively traded securities. You can hold to maturity or sell immediately if cash is needed. This flexibility is highly advantageous for portfolio management.

4. Tax advantages

U.S. Treasury interest income is subject to federal tax but exempt from state and local taxes. This enhances post-tax returns.

Four Risks That Are Easy to Overlook

Even safe assets carry risks.

1. Interest rate risk

When rates rise, existing bonds’ market value declines because new bonds offer higher yields. If you need to sell before maturity, you may incur losses.

2. Inflation risk

Bonds pay fixed interest, which may not keep pace with inflation. For example, holding a bond with a 3% yield in an environment with 5% inflation erodes real purchasing power. However, inflation-linked bonds(TIPS) can mitigate this risk to some extent.

3. Exchange rate risk

Particularly relevant for Korean investors. Since bonds are denominated in USD, a weakening dollar can lead to losses when converted to Korean won. While a recent dollar strength trend favors U.S. bonds, future exchange rate movements are unpredictable.

4. Credit risk

Theoretically possible that the U.S. government defaults, but given its top credit rating, the probability of this happening is extremely low.

How to Actually Purchase U.S. Treasuries?

Depending on investment goals and risk appetite, there are three methods.

( Method 1: Direct Purchase )Minimal Cost + Full Control###

Advantages:

• No management fees
• Full control over the bonds
• Receive full principal and interest at maturity

Disadvantages:

• Purchase limit of $10,000 per person per year
• Managing multiple bonds can be complex
• Potential losses if selling before maturity during rising interest rates

Recommended for: Conservative individuals seeking long-term holding, retirees needing regular income

Method 2: Bond Mutual Funds ###Professional Management + Diversification(

Advantages:

• Managed actively by professional fund managers
• Diversify with small capital
• Lower risk compared to individual bonds

Disadvantages:

• Management fees reduce net returns
• No direct control over individual bonds

Recommended for: Investors wanting professional management, risk-averse with a focus on diversification

) Method 3: Bond ETFs ###Low Cost + High Liquidity(

Advantages:

• Trade freely on stock exchanges like stocks
• Much lower management fees than mutual funds
• High transparency and flexibility

Disadvantages:

• Price volatility similar to stocks
• As passive funds, may miss market opportunities
• Tracking errors)tracking error### can occur

Recommended for: Investors seeking low-cost investment and direct asset management

Optimal Strategy for Korean Investors: Combining U.S. and Korean Bonds

( Why combine bonds from two countries?

1) Regional diversification to reduce risk Economic cycles of Korea and the U.S. do not always align. When one is in recession, the other may grow, reducing portfolio volatility.

2( Currency risk hedging Holding assets in both KRW and USD can partially offset losses from exchange rate fluctuations. When the dollar is strong, U.S. bonds are advantageous; when the won appreciates, domestic assets provide protection.

3) Yield optimization Compare yield curves of both countries and weight toward the higher-yielding side to maximize overall returns.

Practical strategies include:

Strategy 1) Partial currency hedge Hedge only part of U.S. bond investments, leaving some exposed to dollar movements. This reduces currency risk while capturing potential dollar strength gains.

Strategy 2) Duration matching Duration) measures bond sensitivity to interest rate changes. Align the maturity structures of Korean and U.S. bonds to adjust overall interest rate risk. For stability, increase long-term U.S. bonds; for lower volatility, favor short-term bonds.

Strategy 3### Tax optimization Korea and the U.S. have a double taxation avoidance agreement)DTA), preventing double taxation on the same income. Consult tax professionals to optimize tax benefits.

( Concrete Example: Balanced Portfolio

Assuming a 50% Korean bond + 50% U.S. bond allocation:

• Achieves both principal preservation and regular income
• Reduces dependence on a single economy
• Exchange rate fluctuations impact portfolio value, but assets complement each other

If 50% of U.S. bonds are hedged against currency risk, during dollar strength, unhedged parts yield higher returns in KRW terms; during dollar weakness, hedged parts offset losses.

Conclusion: Why You Should Watch U.S. Treasury Yields Now

U.S. bond yields are more than just income sources—they are signals of the global economy. U.S. Treasuries offer the highest creditworthiness, excellent liquidity, and regular income.

However, understanding and managing risks related to interest rates, inflation, exchange rates, and credit is crucial. For Korean investors, combining U.S. and domestic bonds can simultaneously achieve regional diversification, currency hedging, and yield optimization.

Choose the method—direct purchase, mutual funds, or ETFs—based on your investment horizon, risk profile, and capital. Most importantly, stay attentive to U.S. bond yield movements and adapt flexibly to market conditions.