U.S. Treasury Yields Struggle to Rise – Down to 4.65%: Understanding U.S. Treasury Bond Characteristics and Investment Considerations

In the U.S. Treasury bond market on the 10th, the long-term zone saw a significant rebound, with the yield on the 10-year Treasury note dropping by 0.15%, ending the day at 4.65%.

This rise in bond prices was attributed to dovish statements made by officials of the U.S. Federal Reserve (FRB), which alleviated concerns about the prolonged tightening of U.S. monetary policy.

Additionally, amid geopolitical risk due to the Middle East situation, U.S. Treasuries, considered relatively safe assets, were in demand.

However, the market saw some minor setbacks as a result of weak demand in the auction of 3-year Treasury notes.

Here, we will delve into the characteristics of U.S. Treasury bonds and points to consider when investing.

■　Understanding the Characteristics of U.S. Treasury Bonds and Investment Considerations

U.S. Treasury Bonds, also known as U.S. Treasuries, are among the most critical financial instruments in the bond market and a favored investment choice for investors worldwide.

They are issued by the U.S. government to raise funds for various purposes, and their characteristics make them attractive in terms of both safety and returns.

In this discussion, we will explore the fundamental characteristics of U.S. Treasury bonds, the difference between coupon and zero-coupon bonds, new issuances versus secondary market bonds, risk factors associated with them, and strategies for investing in U.S. Treasuries.

■　Fundamental Characteristics of U.S. Treasury Bonds

U.S. Treasury bonds are debt instruments issued by the U.S. government.

They have specific maturities and make periodic interest payments. As a result, investors can expect stable returns. Let’s look at the key features

Maturity Period:

U.S. Treasury bonds come with various maturity periods. For example, a 10-year bond has a maturity period of ten years, and during this time, the principal amount remains unpaid.

Interest Payments:

U.S. Treasury bonds have fixed interest rates, and they pay interest semi-annually. This provides investors with regular cash flows.

Safety:

These bonds are backed by the U.S. government, making them exceptionally secure investments, with minimal risk of default.

While U.S. Treasury bonds are known for their safety and stable returns, they do have various characteristics that investors should understand.

■　Differences Between Coupon and Zero-Coupon Bonds

Within the realm of U.S. Treasury bonds, coupon bonds and zero-coupon bonds exhibit different features. Let’s explore these distinctions:

Coupon Bonds:

Coupon bonds come with regular interest payments and the repayment of the principal amount at maturity.

This characteristic makes them appealing to investors seeking stable income.

Zero-Coupon Bonds:

Zero-coupon bonds, in contrast, do not make periodic interest payments. Instead, they grow in value through compound interest and are repaid as a lump sum at maturity.

This results in the principal amount being greater than the original face value.

Investors can choose between coupon bonds, which provide regular income, and zero-coupon bonds, which enhance the principal amount’s growth.

The decision often hinges on individual investment strategies.

■　Differences Between New Issuances and Secondary Market Bonds

U.S. Treasury bonds can be categorized into newly issued bonds and secondary market bonds, each with significant distinctions:

New Issuances:

Newly issued bonds are those introduced to the market for the first time. They have a fixed issuance price, which is the same as the purchase price, and fixed interest rates set when they are issued.

These bonds are usually sold through auctions, with prices subject to supply and demand, but the interest rate is predetermined.

Secondary Market Bonds:

Secondary market bonds are bonds already in circulation and traded in the open market.

Their prices and interest rates fluctuate depending on market supply and demand and financial market conditions.

Understanding these differences is crucial for investors. New issuances provide predictability, with prices and interest rates set in advance.

In contrast, secondary market bonds depend on market dynamics, requiring accurate predictions of market movements.

■　Risk Factors in U.S. Treasury Bonds

While U.S. Treasury bonds are generally considered safe, there are specific risk factors that investors should be aware of:

Interest Rate Hikes:

U.S. Treasury bond prices and yields are closely tied to interest rates.

Recent interest rate hikes have driven up yields on U.S. Treasury bonds, potentially leading to price declines.

Inflation:

Rising inflation can reduce the real returns on bonds. Given that U.S. Treasury bonds have fixed interest rates, increasing inflation rates can erode actual returns.

Interest Rate Volatility:

Interest rate fluctuations affect U.S. Treasury bond prices.

When interest rates rise, newly issued bonds offer higher yields, potentially leading to price decreases in existing bonds.

These risk factors can influence the profitability and value of U.S. Treasury bonds, emphasizing the importance of managing risks and balancing portfolios.

■　Investment Strategies for U.S. Treasury Bonds

When investing in U.S. Treasury bonds, it’s crucial to consider strategies that align with your specific investment objectives and risk tolerance.

The U.S. Treasury bond market offers various options, and portfolio diversification is key. Here are some essential considerations

Maturity Selection:

Choose the maturity period that aligns with your risk and return objectives.

Short-term bonds are stable with lower risk but lower yields, while medium and long-term bonds offer higher yields and potential returns.

Coupon vs. Zero-Coupon Bonds:

Depending on your income and growth goals, decide whether coupon bonds or zero-coupon bonds best suit your investment strategy.

New Issuances vs. Secondary Market Bonds:

Evaluate the predictability and market dependency of new issuances and secondary market bonds when building your portfolio.

Diversification:

Diversify your portfolio by combining different maturities, bond types, and new issuances versus secondary market bonds.

Diversification helps mitigate risk and optimize returns.

Risk Management:

Implement risk management strategies, such as balancing your portfolio with other asset classes or employing hedging techniques.

■　Conclusion

U.S. Treasury bonds offer both safety and the potential for returns, but the right strategy depends on your investment goals and risk tolerance.

While U.S. Treasury bonds provide a safe haven, they can also be powerful tools for planned investments.