Complete Guide to U.S. Bond Investment: From Selection to Yield Calculation

Basic Knowledge of U.S. Bonds

U.S. bonds (i.e., U.S. government bonds) are an important tool for the U.S. federal government to borrow funds from the market. The government raises capital by issuing these bonds and commits to returning the principal and paying interest at the agreed-upon maturity date. Due to the highest credit rating in the world, U.S. bonds have become the most stable asset choice in international portfolios, favored by global institutional and individual investors.

Comparison of Types and Characteristics of U.S. Bonds

U.S. bonds are divided into four main categories based on maturity, each with unique cash flow characteristics and risk profiles.

Short-term Bonds: Liquidity Tools

Short-term bonds (Treasury Bills) have maturities of less than one year, typically issued in 4-week, 13-week, 26-week, or 52-week terms. These bonds are issued at a discount, with no periodic interest payments. For example, a short-term bond issued at 1% interest, purchased at $99 with a face value of $100, will be redeemed at face value upon maturity.

Because of their short maturity, short-term bonds are suitable for investors seeking quick liquidity or short-term capital allocation.

Medium-term Bonds: The Balance of Yield and Risk

Medium-term bonds (Treasury Notes) have maturities ranging from 2 to 10 years, commonly issued in 2, 3, 5, 7, or 10-year terms. Interest is paid semiannually, making them the most actively traded bonds in the market. The 10-year U.S. government bond holds the position of a “global asset pricing anchor,” widely used to gauge overall bond market trends.

Long-term Bonds: Stable Income for Long-term Allocation

Long-term bonds (Treasury Bonds) cover 10 to 30 years, most commonly 30-year bonds. Interest is also paid semiannually. Despite the longer duration, since they can be freely traded in the secondary market, liquidity generally is not a major concern.

Inflation-Protected Securities: Hedging Against Price Risks

Inflation-Protected Securities (TIPS) have a core mechanism of linking principal to the Consumer Price Index (CPI). When inflation rises, the principal automatically increases; during deflation, the principal decreases but not below the original face value. Interest is calculated on the adjusted principal, so higher inflation results in higher interest payments.

Example: Buying a $1,000 face value TIPS with a 1% interest rate. If inflation reaches 5% that year, the principal adjusts to $1,050, and the interest payable is $10.50 (higher than the original $10).

Issuance and Trading Mechanisms of U.S. Bonds

The U.S. government issues bonds through regular auctions. Short-term bonds are issued weekly, medium-term monthly, and long-term bonds are scheduled flexibly on a quarterly or monthly basis. Investors can check the issuance schedule on the U.S. Department of the Treasury’s official website (Treasury Direct).

For investors in Taiwan, since Treasury Direct accounts are limited to U.S. residents, secondary market trading of already issued bonds becomes the main channel.

Three Main Ways to Buy U.S. Bonds in Taiwan

Direct Purchase of Bonds

Buying existing bonds through overseas brokers or domestic securities firms. Compared to domestic channels, overseas brokers offer more varieties, faster quotes, and lower transaction costs.

Process: Open a securities account → Search for bond codes or filter → Place order (pay attention to bid-ask spread and commissions) → Hold and receive interest or trade at any time.

Advantages: High liquidity, flexible allocation adjustments.

Disadvantages: High minimum purchase (usually starting at $1,000), transaction fees including commissions and deposit/withdrawal fees, prices affected by market fluctuations.

Bond Funds

Bond funds pool various bonds together to help investors diversify risk. The minimum investment is lower (usually starting at $100), but management fees apply.

Bond ETFs

Bond ETFs are traded freely on trading platforms like stocks, with much lower transaction costs than bond funds, making them more suitable for small investments. Common types include:

• TLT: Focuses on long-term bonds over 20 years
• IEF: Focuses on intermediate-term bonds of 7-10 years
• SHY: Mainly invests in short-term bonds of 1-3 years
• VGSH: Broad short-term bond index fund
• TIP: Inflation-protected bond fund
• GOVT: A diversified U.S. Treasury bond portfolio

Meaning and Calculation of U.S. Bond Yields

Bond yields reflect the investment return level and are divided into two types:

Current Yield

Formula: Annual interest ÷ Current price × 100%

Simple and easy to understand but does not consider yield to maturity.

Yield to Maturity (YTM)

This is the actual annualized return an investor receives if holding the bond to maturity, considering interest income and principal gains or losses. Because the calculation is complex, investors usually do not compute it manually but check via:

• Official data: Yield curves published daily by the Federal Reserve or U.S. Department of the Treasury
• Market platforms: Investing.com, CNBC, WSJ, and other financial info sites
• Broker platforms: Most securities trading platforms allow filtering specific bonds and directly viewing YTM

Key Factors Affecting U.S. Bond Prices

Bonds have a crucial characteristic: price and yield are inversely related. The higher the price, the lower the potential yield; the lower the price, the higher the potential yield.

Internal Factors

Maturity and coupon rate: Longer maturity increases risk, often issued at lower prices to compensate investors. Higher coupon rates are more attractive.

External Factors

1. Interest Rate Environment

When market interest rates rise, newly issued bonds offer higher coupon rates. Consequently, existing bonds become less attractive, and their prices fall. Conversely, when rates fall, existing bonds become more attractive, and prices rise. Recent years of Federal Reserve rate hikes have caused current interest rates to soar, leading to significant declines in existing bond prices and substantial increases in yields.

2. Economic Conditions

During recessions, market interest rates tend to decline, capital flowing into bonds for safety, pushing prices up. During economic booms, investors seek higher-yield assets, putting downward pressure on bond prices.

3. Inflation

Rising inflation triggers interest rate hikes, which lower bond prices. Investors worry that bond interest payments cannot keep up with eroding purchasing power, demanding lower prices for compensation. Conversely, deflationary environments favor bond appreciation.

4. Issuance Volume

When the government increases bond issuance beyond market absorption capacity, oversupply causes prices to fall. Moderate issuance generally does not cause significant market impact.

Core Points for Investing in U.S. Bonds

As the most liquid and highest credit fixed-income asset globally, U.S. bonds are suitable for investors seeking stable returns and risk diversification. Choosing the right bond type, purchase method, and timing will directly influence investment returns.

For Taiwanese investors, bond ETFs, with their low minimums, low costs, and high liquidity, are the most convenient way to participate in the U.S. bond market.