1. What are U.S. Treasury Bonds?

U.S. Treasury bonds are debt instruments issued by the U.S. Treasury Department to raise funds for the operation of the federal government. As one of the world's largest economies, the U.S. government has the ability and resources to fulfill its debt obligations, and its historical record of zero defaults makes it one of the safest assets globally.

2. Why Buy U.S. Treasury Bonds?

  1. High Credit Rating:U.S. Treasury Bonds, considered a safe and reliable investment choice, are fully credit-backed by the U.S. government for timely payment of interest and principal, meaning they have the U.S. government's credit endorsement. To date, U.S. Treasury Bonds have never experienced a credit default, providing investors with confidence. The U.S. government is also considered one of the most reliable debtors globally.

  2. Good Liquidity:Most U.S. Treasury Bonds are highly liquid assets, meaning they can be easily sold for cash.

  3. Diversification:U.S. Treasury Bonds have a relatively low correlation with other major assets, meaning they don't rise and fall in unison with other major equity assets in the same market environment, providing investors with good diversification opportunities.

  4. Continuous Cash Flow: Investing in certain bonds can provide a steady cash flow. For example, medium and long-term U.S. Bonds (Bonds & Notes) typically pay interest as scheduled, allowing investors to choose different bonds according to their capital plans. Investors can also adjust the cash flow of their investment portfolio flexibly through other asset allocation methods to match their own funding needs.

3. Potential Risks of Investing in U.S. Treasury Bonds

Credit Risk

  • Credit risk refers to the risk of bond issuers being unable to repay the principal or pay interest on time. Credit risk is crucial to bonds because it directly affects the bond's price and investment returns. Generally, bonds with higher credit quality usually have lower returns, while those with lower credit quality tend to offer higher returns.

  • For U.S. Treasury Bonds, the "credit risk" lies in the U.S. government's inability to repay the principal or pay interest on time. In the long term, the continuously increasing debt size poses challenges to the sustainability of U.S. finances, meaning the government needs to frequently borrow funds to meet its obligations (such as social security, defense, interest payments, etc.). According to U.S. law, the two houses of Congress can control the size of federal debt by setting a debt ceiling. Debates often arise over raising the debt ceiling when the two houses are controlled by different political parties, significantly impacting the government's available funds and potentially affecting debt repayment expectations. A technical default could occur if the debt ceiling is not raised, preventing the government from paying its "bills," including interest payments to U.S. Treasury Bond investors. Although the U.S. government has never defaulted historically, theoretically, there is still a credit risk.

Interest Rate Risk

  • Interest rate risk arises from changes in market interest rates, leading to fluctuations in bond values. It is an important consideration in all fixed-income investments, including government bonds. The price of fixed-rate bonds is inversely related to market interest rates: when interest rates fall, bond prices rise; conversely, when interest rates rise, bond prices fall. For example, if Investor A buys a $1,000 face value, 5% coupon rate, 10-year fixed-rate bond, it means the bond will pay $50 interest annually (1000 * 5%) and return the $1,000 principal upon maturity. However, if market interest rates rise from 5% to 6% after A's purchase, the attractiveness of A's 5% bond significantly decreases as new bonds with higher coupon rates are issued, and other investors have higher-rate bonds to choose from, likely causing the bond's price to drop. If A decides to sell the bond, they can only do so at a discount, resulting in a loss.

  • For U.S. Treasury Bonds, different types of bonds are affected to varying degrees by interest rates. Generally, short-term bonds (T-Bills) are less sensitive to interest rate changes, while medium and long-term bonds (T-notes and T-bonds) are more affected by market interest rate fluctuations. Thus, holding different maturities of government bonds can reduce the impact of interest rate movements on the investment portfolio.

4. Types of U.S. Treasury Bonds

Treasury Bills (T-Bills):

  1. Short-term bonds with maturities of one year or less, sold at face value or at a discount. When bills mature, you're paid the face amount. Unlike conventional bonds, T-bills don't pay fixed annual or semi-annual interest and are issued at a discount, meaning they're sold for less than their face value at maturity.

  2. For instance, if an investor purchases a $1,000 face value T-bill at a price of $980, the investor pays $980 and then receives $1,000 when the T-bill matures. The $20 difference is the investor’s earnings or actual interest, equivalent to an intrinsic, implied interest rate, but this is not a fixed interest payment obtained through the traditional coupon rate.

Treasury Bonds and Notes:

  1. Medium to long-term securities. Notes have maturities of 2, 3, 5, 7, or 10 years, paying interest every six months. The coupon rate for specific securities is set at auction.

  2. Bonds are long-term securities with 20 or 30-year maturities, paying interest semi-annually.

5. Trading U.S. Treasury Bonds Using the Tiger App

Investors can invest in over 360 different types of bonds with varying maturities through the Tiger Securities APP, including short-term Treasury bills, medium-term Treasury notes, and long-term Treasury bonds.

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