01 · Treasury Investment in Practice
Treasuries (US government bonds) are the anchor of the global risk-free rate and the "cleanest fixed income" ordinary investors can buy — no credit risk (under the assumption that Treasuries don't default), only interest rate risk.
The concepts chapter covered "price and yield move inversely." This chapter dives into practice: how instrument types are classified, how to read yields, which channels to buy through, what duration really means, when to hold to maturity, when to sell, and how much an ordinary investor should actually allocate.
I. Treasury Types: T-Bill / T-Note / T-Bond
The US Treasury issues debt in three maturity buckets, colloquially lumped together as Treasuries:
| Instrument | Maturity | Quote convention | Characteristics |
|---|---|---|---|
| T-Bill | Under 1 year (4/8/13/26/52 weeks, etc.) | Issued at a discount: bought below par, redeemed at face value at maturity, no interim coupons | A near-cash instrument with minimal rate sensitivity; tracks the Fed's policy rate most closely |
| T-Note | 2 / 3 / 5 / 7 / 10 years | Quoted against par of 100, pays interest semiannually | The 10Y is the world's most actively traded bond and the strongest pricing benchmark |
| T-Bond | 20 / 30 years | Quoted against par of 100, pays interest semiannually | Longest duration, most rate-sensitive, and the most likely to get hurt in hiking cycles |
📖 Quote Conventions
T-Notes/T-Bonds are quoted against a "par of 100" basis — 98.5 means 98.5% of face value; trading also commonly uses 1/32-point (tick) granularity. Exact quoting rules are subject to the latest regulations/policy and your broker's conventions.
Intuition for Choosing a Maturity
- Dollars you'll need within a year (or might) → T-Bills: like a deposit, almost no price movement.
- A steady 3–5 year allocation → intermediate T-Notes: middle ground on both yield and volatility.
- 10y/30y → violent volatility; these are the main battleground for institutions and hedge funds. Retail investors should understand exactly what they're buying before touching them.
Two Advanced Instruments (As Needed)
| Instrument | What it is | Features |
|---|---|---|
| TIPS (Treasury Inflation-Protected Securities) | Treasuries whose principal adjusts with the CPI index | Purpose-built inflation fighters; real yields are usually lower than nominal Treasuries; issued across 5–30 year maturities |
| STRIPS (Separate Trading of Registered Interest and Principal) | Splits a Treasury's coupons and principal into individual zero-coupon securities | Zero-coupon with extremely long duration (a 30-year STRIPS has duration 30); used by institutions for liability matching — rarely by retail |
💡 The Core Logic of TIPS
Nominal yield = real yield + inflation expectations. Rising TIPS yields (i.e., real rates) are the biggest enemy of gold and growth stocks — in 2022 real yields surged and both gold and tech stocks came under pressure, exactly this transmission chain at work (subject to the latest data).
II. How to Read Yields: YTM vs Coupon
Two concepts must be kept separate (covered in the concepts chapter; a quick review):
| Concept | What it is | Determined by |
|---|---|---|
| Coupon rate (Coupon) | The annual interest percentage fixed in the contract | Market rates at issuance; never changes |
| Yield to maturity (YTM) | The actual annualized return from buying at today's market price and holding to maturity | Fluctuates with market price, changes in real time |
For the same bond, the coupon is a dead number; YTM is alive. When news says "the US 10Y yield is 4.3%," it refers to the YTM level of newly issued 10-year Treasuries — also the pricing benchmark for global assets.
Why does an old 3%-coupon bond deliver a 4% YTM if held to maturity? Because its market price has already fallen below 90 — you buy cheap, so besides collecting $3 of interest per year per $100 face value, you also pocket the gap between face value and purchase price at maturity. Annualized together, that's the YTM.
📖 Two Phrasings, One Fact
When media say "yields rose" = "bond prices fell" = "bond bear market" — two phrasings for one fact; don't get spun around.
III. Price and Yield Move Inversely: A Back-of-Envelope Estimate
Bond prices move strictly inversely to yields (proven in the concepts chapter). Here's a mental-math intuition:
Rule of thumb: a bond with duration of roughly D years moves about D% inversely for every 1 percentage point change in yield. (First-order approximation; ignore convexity correction for now.)
Numeric Example (teaching approximation; actual prices depend on the market)
- Current 10Y Treasury yield is 4.0%; a 30-year bond with a 4% coupon and 100 face value trades at roughly 100.
- If the yield rises to 4.5% (+0.5%), and the 30-year bond's duration is about 17–18:
- Estimated price decline ≈ 17 × 0.5% ≈ 8.5%
- Actual decline is slightly smaller (convexity), about 7%–8%, i.e., price falls to around 92–93.
- For contrast: a 2-year T-Note with duration ~2 drops only about 1% on the same +0.5%.
💡 Long Bonds Are Rate Amplifiers
The same +0.5% in yields: 30-year bonds fall ~8%, 2-year notes only ~1%. Buying 30-year bonds earns you money from falling long-end rates, but the price is enduring 8x the volatility.
IV. Three Ways to Buy Treasuries
| Method | Threshold | Pros | Cons |
|---|---|---|---|
| Direct brokerage purchase (IBKR and other international brokers) | Just open an account; single trades from a few thousand dollars | Precise selection of maturity/coupon; can hold to maturity; no management fee | Account opening and capital outflow compliance requirements are strict; bid-ask spreads are unfriendly to small sums |
| Treasury ETFs (SHY / IEI / TLT, etc.) | From one share, tens of dollars | Extremely low threshold, good liquidity, easy trading (T+0) | Management fees apply; an ETF has no maturity date, its price never converges back to par, so duration risk persists indefinitely |
| QDII bond funds (domestic USD-bond mutual funds) | From ~1,000 RMB | No overseas account needed; subscribe directly in RMB | Subject to quota premiums and purchase limits (historically common); slow redemption (T+7 common); extra fee layers |
Treasury ETF Duration Comparison (subject to the latest data)
| ETF (reference) | Tracks | Duration (approx.) | Character |
|---|---|---|---|
| SHY | 1–3 year Treasuries | ~2 years | Near-cash substitute, tiny volatility |
| IEI | 3–7 year Treasuries | ~4–5 years | Medium duration, conservative profile |
| TLT | 20+ year Treasuries | ~17 years | High duration, high volatility, the rate bellwether |
📖 Related Products
Tickers subject to the latest regulations/policy; peers include IEF (7–10 years), VGSH (short end), and others, each differing in fees and duration — check holdings maturity before buying.
Practical Details of Direct Bond Purchases (IB and similar brokers)
- Primary market (Auction): the US Treasury auctions new issues on a fixed calendar; brokers can participate on your behalf via non-competitive bids filled at the auction's weighted average price — no bid-ask spread, the simplest way to buy.
- Secondary market purchases: you can trade outstanding bonds at market prices anytime, but note: secondary quotes include accrued interest; the purchase price = clean price + accrued interest. Liquidity varies widely by maturity — best near the 10Y point, wider spreads for off-the-run distant maturities.
- Automatic settlement at maturity: bonds held to maturity have principal plus final coupon credited automatically — no need to sell.
- Fees: brokers typically charge zero commission or no transaction fee (Treasury interest is exempt from state tax at the federal level; reporting rules are subject to the latest regulations/policy) — the main cost is the bid-ask spread.
V. Duration: The Core Measure of Rate Sensitivity
Duration ≈ price sensitivity to rates: a bond with duration 5 moves about 5% (inversely) for every 1% change in rates.
| Instrument | Duration (approx.) | Price at +1% rates | Price at −1% rates |
|---|---|---|---|
| T-Bill (3 months) | <0.25 | −0.25% | +0.25% |
| 2Y T-Note | ~2 | −2% | +2% |
| 10Y T-Note | ~8–9 | −8%~−9% | +8%~+9% |
| 30Y T-Bond | ~17–18 | −17%~−18% | +17%~+18% |
| TLT (20+ ETF) | ~17 | around −17% | around +17% |
Why Did TLT Crash 30%+ During the 2022 Hikes?
In 2022 the Fed hiked aggressively; the 10Y yield went from ~1.5% to above 4%, and long-end yields rose even more:
- TLT's duration is ~17; yields rose about 2 percentage points → first-order estimate is a 34% price drop; adding convexity effects and basis effects measured off the post-September-2022 high gives an actual drawdown of 30%+ — that's the mechanism behind "the safest asset" losing 30% that year.
- Over the same period the 2-year ETF (duration ~2) drew down only a few percent.
Duration cuts both ways: in easing cycles TLT also rebounds hardest (it surged when rate-cut expectations heated up in late 2023). It isn't a "direction" indicator — it's a "volatility multiplier" indicator.
💀 Iron Rule: Duration Is a "Volatility Multiplier," Not a "Direction" Indicator
Duration cuts both ways. TLT with duration 17 loses roughly 17% of price for every 1% rise in yields — during the Fed's aggressive 2022 hikes it crashed 30%+ in a single year; that's the mechanism behind "the safest asset" losing 30%. So duration isn't a "direction" indicator but a "volatility multiplier": buying 30-year bonds earns money from falling long-end rates, but the price is enduring 8x the volatility.
VI. Hold to Maturity vs Trade: Two Completely Different Kinds of Money
Hold to Maturity (Buy & Hold)
- The YTM at purchase is locked in: hold to maturity and no matter how rates move along the way, you earn the YTM you locked in (provided no default; Treasuries are considered extremely low credit risk in local-currency terms).
- Interim price declines are just "paper losses"; receiving par at maturity closes it out — interim mark-to-market swings contribute exactly zero to the realized return.
Selling Before Maturity (Trading)
- The price is fully exposed to rate fluctuations: rates up → sell at a loss; rates down → sell at a profit.
- Here your profit doesn't come from the coupon but from getting the direction of rates right — that's already "trading."
Numeric Example (teaching approximation)
- Buy a 30-year bond at YTM 4% and hold to maturity → 4% annualized, locked.
- Rates rise to 5%; the price drops 8%; you sell now → roughly an 8% loss on principal (plus accrued interest earned while holding).
- Same scenario, but if you hold to maturity, not a cent of the 4% YTM is missing — that's the moat of "holding to maturity" over "trading."
💡 Conclusion: Decide First Which Money You're Chasing
If you buy for the yield-to-maturity, pick a term without guessing direction; if you buy for the price spread, you must hold a view on rates. Most retail losses come from taking money meant to be "held to maturity" and turning it into a "sell-before-maturity" trade.
⚠️ Counterintuitive: Holding vs Selling Earns Two Completely Different Kinds of Money
If you buy for the yield-to-maturity, pick a term without guessing direction; if you buy for the price spread, you must hold a view on rates. Held to maturity, the YTM arrives intact; sold early, the price is fully exposed to rate swings — most retail losses come from turning "hold-to-maturity" money into a "sell-early" trade. So before buying Treasuries ask yourself: is this money meant to be held to maturity, or traded on the direction of rates?
VII. Treasuries as a Near-Substitute for Dollar Cash
T-Bills and dollar cash (USD deposits / USD money funds) are close cousins:
| Tool | Yield character | Liquidity | Risk |
|---|---|---|---|
| USD bank deposits | Posted bank rate, moves with the Fed | Term deposits lock funds; early withdrawal pays demand-deposit rates | Very low |
| USD money market funds | Track short-term rates; historically close to T-Bills | T+0/T+1 | Very low |
| T-Bills (<1 year) | Market-based "cash yield," usually above same-term deposits | Sellable any time in the secondary market | Very low; price fluctuation negligible |
The "cash yield" logic: when Fed rates sit high, simply "sitting in cash" earns 4%–5% annualized (subject to the latest rates) — that itself is an asset allocation decision. (The so-called T-Bill carry trade — borrowing low-rate currency, converting to USD, and buying T-Bills for the differential — is institutional behavior; individuals mainly use its yield as a comparison benchmark.) When risk-free cash yields are high enough, the opportunity cost of stocks and long bonds rises — exactly why high rates suppress risky assets.
VIII. Allocation Framework for Ordinary Investors
Start With the Yield Comparison (common-knowledge figures; subject to the latest rates)
| Option | USD annualized (approx.) | Volatility | Suited for |
|---|---|---|---|
| USD demand / call deposits | Low | None | Dollars needed anytime |
| USD time deposits | Medium (generally higher with longer terms) | None (except early withdrawal) | Funds untouched for 1–2 years, locking the term rate |
| USD money fund / T-Bills <1 year | Close to the Fed rate | Very low | Cash management within a year |
| Intermediate Treasuries / short-duration ETFs | Term premium | Small–medium | A steady 2–5 year allocation |
| Long Treasuries / TLT | Long-end yield + capital gains elasticity | Large | Betting on falling rates or hedging a portfolio |
Lock Long or Lock Short: A Decision Framework
- No idea where rates go → lock short: T-Bills/short-term paper — decent yield, zero volatility, essentially "pocketing the Fed's rate."
- Believe hikes are ending / cuts are coming → lock long: pre-lock high long-end yields, plus potential capital gains as prices rise (duration gains).
- Portfolio "insurance" → use long bonds: in years when stocks crash and rates fall, long bonds are negatively correlated with equities — a hedge (note it fails in stock-bond double-crush years like 2022).
- RMB considerations → remember returns are in dollars: converting Treasury returns back to RMB stacks FX volatility on top; RMB appreciation eats into returns (see Chapter 14 on overseas allocation).
Common Mistakes
- Buying 30-year bonds as a "deposit" — not realizing you're trading duration.
- Going all-in on long bonds mid-hiking-cycle to catch the bottom — the 2022 lesson: while the rate trend hasn't ended, duration can keep breaching your tolerance for unrealized losses.
- Buying QDII RMB share classes at high premiums — the premium itself is where losses begin.
- Looking only at "the YTM number" without checking "remaining maturity" — a 5% 10-year and a 5% 30-year are entirely different investments (double the duration, double the volatility).
- Confusing "coupon income" with "total return" — in easing cycles an ETF's total return includes capital gains, of which the coupon is just part; in hiking cycles the coupon won't cover price losses.
One-Line Summary
Treasuries are the "cleanest" allocation tool ordinary investors can buy among global assets: use T-Bills for cash, intermediate T-Notes to lock yield, and long bonds to express a rate view or hedge a portfolio — provided you know which duration you're buying.
💀 Iron Rule: Buying a 30-Year Bond as a "Deposit" Means You Don't Know You're Trading Duration
Buying a 30-year bond as a "deposit" — means not realizing you're trading duration. The 2022 lesson: while the rate trend hasn't ended, duration can keep breaching your tolerance for unrealized losses. So the first question when buying Treasuries should be: which duration am I buying, and can I stomach its sensitivity to rates?
Risk Warning
⚠️ Risk Warning
Treasuries are not a "risk-free asset": interest rate risk (long-duration instruments can swing 10%–30% in price), currency risk (volatility when converting dollar assets back to your home currency), and inflation risk (if nominal returns trail inflation, you lose in real terms) all exist. Holding to maturity locks the YTM, not purchasing power. Overseas brokers/capital outflows must comply with current FX and regulatory rules (subject to the latest regulations/policy). All yields, durations, and prices here are teaching approximations; defer to the latest market data. This article is not investment advice.