Is investing in US bonds truly safe? Things you need to know

In recent years, as economic volatility has increased, many Korean investors have turned their attention to one asset class: U.S. bonds. Driven by the belief that “the U.S. will never go bankrupt,” massive amounts of capital flow into them. But is that really the case? In this article, we’ve compiled everything you need to know—from how to buy U.S. bonds to hidden risks.

What exactly are bonds?

Simply put, bonds are “loans that governments or companies give to you.” When a government needs funds to operate the country, it borrows from its citizens, which is called government bonds.

The repayment method is straightforward. Until the maturity date(,) bonds pay interest every half-year or year, and at maturity, the full principal is returned. This is the basic mechanism of bonds.

So, what are the most actively traded products in the bond market? It’s the U.S. 10-year Treasury bond. The reason long-term bonds are traded more than short-term ones is because they serve larger investment purposes.

How do different types of U.S. bonds differ?

U.S. Treasury bonds are categorized into three types based on maturity:

T-bill(Short-term Treasury): Matures in less than 1 year. Very low risk but also lower returns.

T-note(Medium-term Treasury): Matures in 1–10 years. A middle ground between short and long-term bonds.

T-bond(Long-term Treasury): Matures in 10–30 years. Offers fixed interest rates and is popular among investors seeking stable income over a long period.

When the economy becomes unstable, investors tend to buy more long-term bonds, which can cause long-term yields to fall below short-term yields—a phenomenon called an inverted yield curve. This signals a potential upcoming recession.

The relationship between interest rates and yields—confusing but important

Many people think of interest rates and yields as the same, but they are actually different.

Yield( is the actual return you get when you buy a bond, divided by the purchase price. So, your yield depends on how much you pay for the bond.

The key point is that bond prices and interest rates move inversely.

When demand for bonds increases, prices go up, and even if the coupon payments stay the same, the yield drops. Conversely, if many investors sell bonds, prices fall, and yields rise. Ultimately, yields reflect investor sentiment and market conditions.

Why invest in U.S. bonds?

1. They are truly safe
U.S. government guarantees repayment, so the risk of default is virtually zero. This is why investors flock to them during economic downturns.

2. Predictable income
Fixed interest rates and payment schedules make them ideal for retirees or those needing stable income.

3. Easy to buy and sell
U.S. bonds are the most traded in the bond market, meaning you can liquidate quickly when needed. This flexibility is advantageous for portfolio adjustments.

4. Tax benefits
Interest income is subject to federal tax but exempt from state and local taxes, increasing after-tax returns.

Are they really risk-free?

1. Interest rate risk
If you buy bonds and interest rates rise, new bonds will offer higher yields, causing your existing bonds’ market value to fall. Selling before maturity could lead to losses.

2. Inflation risk
Fixed-rate bonds can’t keep up with rising prices. If inflation is 5% but your bond yields only 3%, you’re effectively losing 2%. While TIPS (Treasury Inflation-Protected Securities) are designed to hedge against this, regular bonds are not.

3. Currency risk
For Korean investors, this can be critical. If the dollar weakens against the won when converting back, even high interest payments can result in losses.

4. Credit risk
While the U.S. is highly unlikely to default, it’s not impossible—political crises or severe economic downturns could pose risks.

How to buy U.S. bonds?

Method 1: Direct purchase
Buy directly from the U.S. Treasury via TreasuryDirect or through securities firms in the secondary market.

• Advantages: No management fees; you receive interest and principal at maturity.
• Disadvantages: Personal investment limit of $10,000; multiple bonds needed for diversification can be cumbersome.
• Recommended for: Conservative investors planning to hold to maturity, retirees needing steady income.

Method 2: Bond funds
Invest in mutual funds that pool money from many investors to manage diversified bond portfolios, managed by professionals.

• Advantages: Access to a variety of bonds with smaller amounts; professional management.
• Disadvantages: Management fees reduce returns; less control over individual bonds.
• Recommended for: Investors seeking active management or diversification.

Method 3: ETFs (Exchange-Traded Funds)
Funds that track specific bond indices, traded on stock exchanges like stocks.

• Advantages: Lower fees than bond funds; high liquidity and tradability.
• Disadvantages: Prices fluctuate with market volatility; passive management means less responsiveness to market changes.
• Recommended for: Cost-conscious investors who prefer passive investing.

For Korean investors: consider a combined Korea-U.S. bond portfolio

Holding both Korean and U.S. bonds creates a smarter, more resilient portfolio.

Diversification benefits
Korean and U.S. economic cycles are not perfectly correlated. When Korea faces a downturn, the U.S. might still grow, offsetting losses.

Optimizing returns
Yield curves differ between the two countries. You can allocate more to the higher-yielding side. Currency arbitrage opportunities also arise when interest rate differentials widen.

Managing currency risk
Holding both won and dollar assets reduces exposure to exchange rate fluctuations. When the dollar strengthens, U.S. bonds perform better; when it weakens, Korean bonds may provide relative gains.

) Practical strategies for Korean investors

1. Consider currency hedging
Buying U.S. bonds means receiving dollar payments, which must be converted to won. If the exchange rate moves unfavorably, you could incur losses.

Using forward contracts or options can lock in exchange rates, but this limits gains if the dollar moves favorably. Strategy: hedge only 50% of your investment, leaving the rest unhedged to balance risk and opportunity.

2. Match duration
Duration measures a bond’s sensitivity to interest rate changes. Long-term bonds have longer durations; short-term bonds have shorter durations.

If capital preservation is priority, opt for longer-maturity U.S. bonds. To reduce interest rate risk, diversify with shorter-term bonds.

3. Tax strategies
Interest from U.S. bonds is subject to U.S. federal tax and may also be taxed in Korea. However, the Korea-U.S. Double Taxation Agreement (DTA) prevents double taxation. Consulting a tax professional is advisable.

( Real-world portfolio example

Imagine a balanced portfolio with 50% Korean bonds and 50% U.S. bonds.

This mix halves the country-specific economic risks. If one economy faces a crisis, the other can offset losses.

If you hedge 50% of the U.S. bond portion against currency risk, then when the dollar is strong, unhedged gains boost returns; when weak, hedging protects against losses. This approach minimizes overall portfolio damage regardless of exchange rate movements.

Conclusion: approach U.S. bonds wisely

How to buy U.S. bonds is simpler than you think. Choose the method that suits your situation—direct purchase, funds, or ETFs.

But the key is understanding. You must be aware of interest rate risk, inflation risk, currency risk, and credit risk to protect your long-term returns.

For Korean investors especially, combining U.S. and Korean bonds offers diversification benefits. Incorporate hedging, duration matching, and tax strategies to strengthen your portfolio.

Ultimately, investing is a game of information and strategy. Use the insights from this article to craft your own investment plan, and consult professionals if needed—it’s the safest and smartest choice.