U.S. Treasuriesare generally considered one of the safest—if notthesafest—investments in the global financial markets. While this may be true, it still depends on how you invest. If you approach Treasuries in the wrong way, they can be quite risky.
Why Treasuries Are Considered Safe
There are two kinds of risk in the bond market:credit risk and interest rate risk. Credit risk is the risk that an issuer willdefault, while interest rate risk accounts for the impact of changes in prevailing rates. Treasuries are risk-free is in the first instance: credit risk. Despite concerns about the United States’ fiscal health, U.S. government bonds are seen as being among the world’s safest in terms of the likelihood of their interest and principal being paid on time. The United States has never defaulted on its debt in the modern era, although there were some cases of restructuring in the 1800s.
Treasuries are indeed free of credit risk, but they are subject to interest rate risk. While Treasury bills and shorter-term issues don’t suffer much of an impact from rate movements,intermediate-term bonds(those with maturities of five to 10 years) can experience moderate volatility, while longer-term bonds (10 years and longer) can be quite volatile.
If an investor holds a Treasury security until its maturity, this isn’t a factor. While the principal value will fluctuate up and down through the life of the bond based on the changing outlook for interest rates andinflation, the investor can be assured that they will eventually see their original investment returned. However, it does become a factor if the investor is forced to sell a Treasury issue before itsmaturitydate. In this case, the bond’s price will have changed based on market fluctuations, and the investor will receive proceeds that can be more or less than their original investment.
U.S. Treasury Funds and ETFs
Since individual Treasury securities ultimately mature at their full value, an investor in a government bond can rest easy knowing that even if the value of the bond is dropping in the short-term, the principal will be paid back in due time—which isn’t the case withmutual fundsorexchange-traded funds(ETFs) that invest in Treasuries. Unless a fund is a target-date fund with a designated maturity date, funds will never mature.
In funds that invest in shorter-term bonds, that usually isn’t a significant issue since the volatility of the underlying holdings is low—although the price can indeed experience a moderate decline. However, funds that invest inlong-termTreasuries can be exceptionally volatile. If Treasury prices decline, this will result in a loss of principal for the investor. Investors who are considering the purchase of a fund that invests in long-dated Treasuries need to be aware that they are assuming elevated principal risk, even though the underlying securities won’t default.
The Bottom Line
U.S. Treasuries are indeed risk-free for individuals who hold individual bonds until maturity. For those who sell their bonds before maturity or invest in long-dated Treasury funds, there is a risk.
FAQs
U.S. Treasury bonds are fixed-income securities. They're considered low-risk investments and are generally risk-free when held to maturity. That's because Treasury bonds are issued with the full faith and credit of the federal government.
Are Treasury bills safer than government bonds? ›
Their short-term nature and high liquidity make Treasury bills appealing to some investors. Since these investments are often viewed as relatively safe, demand is generally consistent. And though they usually offer lower returns than Treasury bonds or notes, this may not always be the case.
Can you lose money on U.S. Treasury bonds? ›
However, CDs and Treasuries are fixed income investments and subject to similar risks as other fixed income investments. For example, if interest rates rise, the price of a CD or Treasury will fall and if you need the investment prior to maturity and have to sell it, you may lose money.
How are government bonds safe? ›
Government bonds issued by national governments are often considered low-risk investments since the issuing government backs them.
What are the safest US bonds to buy? ›
Treasuries. Treasury securities like T-bills and T-notes are very low-risk as they're issued and backed by the U.S. government. They provide a safe way to earn a return, albeit generally lower than aggressive investments.
Are U.S. Treasury bonds safer than bank CDs? ›
Both certificates of deposit (CDs) and bonds are considered safe-haven investments with modest returns and low risk. When interest rates are high, a CD may yield a better return than a bond. When interest rates are low, a bond may be the higher-paying investment.
Is it better to buy Treasuries or CDs? ›
Choosing between a CD and Treasuries depends on how long of a term you want. For terms of one to six months, as well as 10 years, rates are close enough that Treasuries are the better pick. For terms of one to five years, CDs are currently paying more, and it's a large enough difference to give them the edge.
Are Treasury bills safer than bank accounts? ›
A Treasury bill, or T-bill, is a short-term debt obligation backed by the U.S. Treasury Department. It's one of the safest places you can save your cash, as it's backed by the full faith and credit of the U.S. government. T-bills are auctioned off at a discount and then redeemed at maturity for the full amount.
Can you lose principal on Treasury bills? ›
The No. 1 advantage that T-bills offer relative to other investments is the fact that there's virtually zero risk that you'll lose your initial investment. The government backs these securities so there's much less need to worry that you could lose money in the deal compared to other investments.
What is the downside of US Treasury bonds? ›
These are U.S. government bonds that offer a unique combination of safety and steady income. But while they are lauded for their security and reliability, potential drawbacks such as interest rate risk, low returns and inflation risk must be carefully considered.
Implications for the Economy: The bond market serves as a barometer for the broader economy. A sustained bond market collapse can signal concerns about economic stability, potentially leading to shifts in government policies and impacting job markets, inflation rates, and interest rates on various financial products.
What is the disadvantage of US Treasury bond? ›
Interest rate risks: As are all bonds, Treasury bonds are subject to price volatility as a result of changes in market interest rates. Inflation risk: The interest earned on Treasury securities may not keep pace with inflation (with the exception of Treasury inflation-protected securities, or TIPS).
Are government bonds safe if the market crashes? ›
"Long-term Treasury bonds may have no default risk, but they have liquidity risk and interest rate risk — when selling the bond prior to maturity, the sales price is sometimes uncertain, especially in times of financial market stress," it said.
Are government bonds 100% safe? ›
Treasury securities are considered a safe and secure investment option because the full faith and credit of the U.S. government guarantees that interest and principal payments will be paid on time.
Are US Treasuries still safe? ›
Treasury bonds have long been considered the financial markets' “safe haven” asset. That remains generally true, but investors should appreciate the risk of default is causing the financial markets to re-assess Treasuries' superiority as a safe haven relative to other assets.
What is the downside of U.S. Treasury bonds? ›
These are U.S. government bonds that offer a unique combination of safety and steady income. But while they are lauded for their security and reliability, potential drawbacks such as interest rate risk, low returns and inflation risk must be carefully considered.
What is the disadvantage of U.S. Treasury bond? ›
Interest rate risks: As are all bonds, Treasury bonds are subject to price volatility as a result of changes in market interest rates. Inflation risk: The interest earned on Treasury securities may not keep pace with inflation (with the exception of Treasury inflation-protected securities, or TIPS).
What is the downside of Treasury I bonds? ›
Key Points. Pros: I bonds come with a high interest rate during inflationary periods, they're low-risk, and they help protect against inflation. Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest.
Is it worth investing in U.S. Treasury bonds? ›
While Treasury bonds don't have a serious risk that the government won't pay you back, they do have two other risks that are typical of bonds: inflation risk and interest rate risk. While Treasury bonds are relatively safe investments, one key risk is that inflation will erode your returns over the years.
