Comprehensive Analysis of U.S. Bond Yields: A Must-Read Guide for Investors from Beginner to Advanced

What are U.S. Treasury Bonds? Why Are They Worth Investing In?

U.S. Treasury Bonds (U.S. Government Bonds) are debt securities issued by the U.S. government, which borrows funds from the public through bond issuance and commits to returning the principal and interest within a specified period.

As the government bonds with the highest credit rating worldwide, U.S. Treasury Bonds are widely regarded as one of the safest investment instruments. Their core appeal lies in stable cash flows and high liquidity—both domestic and international investors are accustomed to considering U.S. Treasury Bonds as a defensive asset allocation in their portfolios.

How are U.S. Treasury Bonds Classified? How Should Investors Choose?

U.S. Treasury Bonds are divided into four main categories based on maturity periods, each with its own characteristics and suitable scenarios:

Short-term Treasury Bills (T-Bills)
Maturity within one year (usually 4 weeks, 13 weeks, 26 weeks, or 52 weeks), issued at a discount as zero-coupon bonds. Investors purchase below face value, and at maturity, they are redeemed at face value, with the yield realized through the discount. Suitable for investors seeking short-term liquidity and quick returns.

Medium-term Treasury Notes (T-Notes)
Maturities from 2 to 10 years, paying interest semiannually, and are the mainstream type of government bonds in the market. The 10-year U.S. Treasury Note is particularly important as a benchmark for global asset pricing and serves as a key indicator of the overall bond market.

Long-term Treasury Bonds (T-Bonds)
Maturities of 20 to 30 years (mostly 30 years), also paying interest semiannually. Despite the longer maturity, they are tradable in the secondary market, offering liquidity comparable to shorter-term bonds, suitable for long-term investors seeking stable income.

Treasury Inflation-Protected Securities (TIPS)
Principal is linked to the Consumer Price Index (CPI), with adjustments based on inflation. When inflation rises, principal increases, and interest payments rise accordingly; during deflation, principal decreases (but at least the original face value is returned at maturity). TIPS are specialized tools for hedging against inflation risk.

Comparison of the Three Main Types of Government Bonds

In recent years, the Federal Reserve’s rate hike cycle has caused short-term bond yields to rise more than long-term bonds, resulting in an inverted yield curve. However, regardless of the term, the overall trend of bond price movements remains generally aligned.

How Does TIPS Work? Detailed Explanation of Inflation Protection Mechanism

TIPS’ innovative mechanism links the principal to inflation dynamics. Here’s an example:

Suppose you buy a TIPS bond with a face value of $1,000 and a 1% interest rate. If inflation reaches 5% that year, the government will adjust the principal to $1,050. Subsequent interest is calculated based on the adjusted principal, i.e., $1,050 × 1% = $10.50, higher than the original $10.

At maturity, the government pays the higher of the inflation-adjusted principal or the original face value, ensuring that investors’ purchasing power is not eroded by inflation.

How Can Investors in Taiwan Purchase U.S. Treasury Bonds? Three Channels Explained

Direct Purchase of Bonds

Through overseas brokers or domestic brokers via cross-border entrustment to buy issued bonds (secondary market). Compared to domestic channels, overseas brokers offer more varieties, faster quotes, and lower fees.

The process includes: opening a securities account → searching for bond codes or using screening tools to select maturity and yield → placing market or limit orders → receiving interest payments and being able to sell in the secondary market at any time.

Advantages include high liquidity and flexible allocation; disadvantages involve high transaction thresholds (minimum purchase of $1,000) and risks such as commissions, fees, and market price fluctuations.

Bond Funds

Bond funds are investment products that hold a basket of bonds, effectively diversifying risk associated with individual bonds. The minimum investment is relatively low (usually starting at $100), but management fees apply. Suitable for investors seeking risk diversification with cost sensitivity.

Bond ETFs

Bond ETFs trade freely on trading platforms like stocks, allowing investors to indirectly hold a portfolio of government bonds. Compared to bond funds, they have lower transaction costs and are more suitable for small investors. 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 Index Fund ETF) — Short-term low-cost option
• TIP (iShares TIPS Bond ETF) — Inflation-protected bonds
• GOVT (iShares U.S. Treasury Bond ETF) — Aggregate government bonds

Comparison of the Three Purchase Methods

What Is the Yield on U.S. Bonds? How Is It Calculated?

U.S. bond yields reflect investment returns and are mainly divided into two types:

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

This is the simplest and most intuitive way to calculate yield, reflecting the immediate return when holding the bond.

Yield to Maturity (YTM)

This is the actual annualized return an investor receives if holding the bond until maturity. The calculation is more complex, considering interest income, principal gains or losses, and the time value of money. YTM fluctuates with market prices.

Investors do not need to manually calculate YTM; they can check it through:

• Official channels: Daily published yield curves by the Federal Reserve or U.S. Treasury
• Market platforms: Investing.com, CNBC, WSJ, and other financial info websites
• Broker platforms: Most trading brokers support filtering specific bonds and viewing real-time YTM data

The Inverse Relationship Between U.S. Bond Prices and Yields

The core characteristic of bonds is fixed cash flows, which leads to an interesting inverse relationship: the higher the bond price, the lower the potential yield; the lower the bond price, the higher the potential yield.

U.S. Treasury Bonds, as a type of bond, inherit this trait. In other words, the yield on U.S. bonds is directly driven by their prices, and the two move inversely.

Internal Factors Affecting U.S. Treasury Bond Prices

Maturity and Coupon Rate

Longer maturity and higher coupon rates tend to move together. Longer maturities entail greater risk, prompting investors to demand lower purchase prices to compensate.

External Factors Affecting U.S. Treasury Bond Prices

Interest Rate Environment

Current interest rates are the main determinant of bond prices. When market rates rise, newly issued bonds offer higher coupons, causing existing bonds with lower rates to fall in price. Conversely, when rates fall, existing bonds with higher coupons increase in price.

The recent Fed rate hike cycle clearly illustrates this mechanism: rising rates lead to falling bond prices and sharply increasing yields.

Economic Conditions

The U.S. economic outlook directly impacts the bond market. During economic downturns, market interest rates tend to decline, prompting capital inflows into bonds for safety, pushing prices up. During economic booms, interest rates are usually higher, putting downward pressure on bond prices.

Inflation

Inflation environments are often associated with higher interest rates. When inflation rises, fixed interest income becomes less valuable, leading investors to demand lower purchase prices to offset purchasing power loss. Thus, bond prices and inflation rates are inversely related.

Issuance Volume and Market Supply

Moderate issuance of government bonds generally does not pressure the market. However, excessive issuance beyond market absorption can lead to oversupply, breaking market balance, causing bond prices to fall and yields to rise.

Key Points for Investing in U.S. Treasury Bonds

U.S. Treasury Bonds are the safest investment tools globally, with diverse product designs to meet different investor needs. Whether it’s ultra-short-term T-Bills for short-term liquidity, long-term bonds for stable cash flow, or TIPS for inflation protection, suitable options are available in the bond market.

For investors in Taiwan, small allocations via ETFs have become the most convenient entry method. To effectively seize opportunities in U.S. bonds, understanding the inverse relationship between yields and prices, and grasping the economic factors influencing the bond market, are essential skills for becoming a mature bond investor.