A guide to investing in US Treasury bonds

Why did bonds attract investment while stocks were falling? Bonds benefit from expectations of interest rate cuts and economic downturns.

However, many individual investors might be unfamiliar with bond trading and its principles. This article aims to simplify US Treasury bonds by covering:

Let's dive in and learn how to invest in US Treasury bonds.

Let's start by understanding what US Treasury bonds are. Issued by the US federal government, these bonds are considered some of the safest investments globally, known for their liquidity and risk diversification.

US Treasury bonds are categorized into short-term, medium-term, and long-term bonds:

When discussing bonds, the term "yield" frequently comes up. It refers not to the bond's interest rate but to its Yield to Maturity (YTM).

1. Example:Suppose you buy a T-Note with a face value of $1,000, a 5% coupon rate, and a three-year maturity. You will receive $50 in interest in the first, second, and third years, plus the $1,000 principal at maturity, totaling $1,150.

While the future income is fixed, the bond's market price can vary depending on market conditions. YTM measures the return rate if the bond is bought at a different price and held until maturity.

- If you buy the bond for $950: The YTM is 6.9%, higher than the 5% coupon rate because you paid less than $1,000 for the same $1,150 future income.

- If you buy the bond for $1,100: The YTM is only 1.6%, lower than the 5% coupon rate because you paid more for the same $1,150 future income.

Not necessarily. If you hold the bond until maturity, the YTM at purchase will be your annualized return. However, if you sell the bond before maturity, your actual return will depend on the selling price, which may differ from the YTM at purchase.

As illustrated, the lower the bond's market price, the higher the YTM; the higher the market price, the lower the YTM. If the bond's market price equals its face value, the YTM equals the coupon rate.

The yield curve is a two-dimensional plot of the treasury yields for different maturities, with yields (YTM) on the Y axis and maturities on the X axis. The normal form of yield curves slopes in the upper right direction and the deformed yield curves show flattening shapes, or even worse, inverted shapes.

The current yield curve is inverted. In fact, since mid-2022, US Treasury yields have been in an inverted state. This unusual and steep yield curve suggests that the bond market is under pressure—remember, higher yields mean lower bond prices.

By the way, we can observe market expectations for interest rate trends through the yield curve. A steep yield curve indicates that the market expects the Federal Reserve to raise rates, while an inverted yield curve suggests that the market anticipates rate cuts.

Since July, US Treasury prices have benefited from expectations of interest rate cuts and economic downturns. These reasons reveal two key factors influencing US Treasury prices:

When the Federal Reserve raises or lowers the benchmark interest rate, Treasury yields will rise or fall correspondingly. Thus, the market typically views rate hikes as negative for Treasuries and rate cuts as positive.

Another important rule: the longer the bond's maturity, the more sensitive its price is to interest rate changes.

During market downturns or crises, safe-haven funds often flow into Treasuries, pushing prices up.

However, in extreme cases, Treasuries can fall along with other risky assets. For instance, on March 18, 2020, during the fourth circuit breaker in 10 days for the US stock market, a liquidity crisis and extreme panic caused Treasury prices to drop sharply.

In addition to these two factors, the following also significantly influence Treasury prices and warrant close attention:

Expansionary fiscal policies may lead to increased government borrowing and Treasuries' supply, which can depress bond prices.

Inflation rates directly affect nominal interest rates, which in turn influence real interest rates.

Foreign central banks are major buyers of US Treasuries. Changes in international relations can affect the demand for Treasuries and, consequently, their prices.

With the market widely expecting interest rate cuts, many investors turn to US Treasury ETFs for indirect exposure to the bond market. These ETFs are easy to buy through a brokerage account and offer benefits like diversification and reduced effort.

Additionally, their monthly dividends are appealing to investors with higher cash needs. Leveraged and inverse bond ETFs also provide more flexibility in investment strategies.

Some of the most actively traded US Treasury ETFs include:

On moomoo, you can find detailed information on U.S. Treasury Bond ETFs by navigating to Markets> ETF > Thematic ETF > U.S. Treasury Bond ETF. Clicking on a specific ETF will allow you to view details such as holdings, dividends, and assets under management (AUM).

- Short-term speculators typically focus on ETFs that invest in medium to long-term or long-term Treasuries, and may even opt for leveraged ETFs.

- Investors seeking low risk and stable returns usually prefer short-term Treasury ETFs.

Investors looking for long-term holdings and stable income might choose to purchase US Treasuries directly. By holding the bonds until maturity, they can avoid the impact of interest rate fluctuations.

Decide on the bond maturity based on how long you plan to hold the investment. Then, compare the yields to maturity and coupon rates to select the most suitable option.

While U.S. Treasury bonds are widely regarded as one of the safest investment vehicles, they are not entirely risk-free. Investors should carefully consider their investment objectives and risk tolerance before making any investment decisions.