Risk Overview

No debt obligation, whether U.S. gov🌌ernment or corporate, is free of all risk. However, U﷽.S. Treasuries of all maturities have long been considered safe from the risk of payment default.

That's because they are backed by the full faith and credit of the U.S. government. Thus, due to the stability of the U.S. government, investors believe that the principal and interest amounts owed on the money that they loan the government when they buy its bonds (and notes and bills) will always be paid.

In addition, Treasuries are extremely liquid, meaning they're easy to buy and sell. The secondary market in Treasuries is the most liquid debt market in the world.

So, U.S. Treasury bonds, also known as T-bonds, are often touted as risk-free investments. The collapse of the government and society could change that, 🗹but not many consider it a real possibility.

Importantly, though, long-term government bonds have other risks, such as the risks posed by changing interest ra💎🔯tes and inflation.

We'll look at those after delving into the concept of long-term T-bonds' credit risk as it relates to payment default.

Government Debt and Credit Ratings

A government's ability to pay off a debt obligation is measured by a country's 澳洲幸运5官方开奖结果体彩网:credit rating. Much like an individual's credit rating is determined by his or her borrowing and 澳洲幸运5官方开奖结果体彩网:repayment history, so too is the U.S. government's.

How It Works

From time to time, governments will borrow funds from other countries and individuals through loans and bonds.

The servicing and repayment of these bonds are carefully measured by financial institutions for 澳洲幸运5官方开奖结果体彩网:creditworthiness.

Specifically, these entities look at a government's lending and repayment history, the level of outstanding debt, and the strength of its economy.

In 2024, the highly respected credit rating company, 澳洲幸运5官方开奖结果体彩网:Standard and Poor's, affirmed its second highest possible rating, AA+, for the U.S. government.

Because U.S. 澳洲幸运5官方开奖结果体彩网:government bonds are backed by the U.S. government and the U.S.𓄧 has the most powerful economy in the world, these bonds are widely considered to be free from the risk of payment default.

When you purchase this type of bond, the U.S. government guarantees that the interest and 澳洲幸运5官方开奖结果体彩网:principal will be paid according to the 澳洲幸运5官方开奖结果体彩网:bond covenants. That is, paymen🐈ts will be made on time and in full.

Potential Pitfalls

Some economists point to 澳洲幸运5官方开奖结果体彩网:the 25% rule which states that any long-term debt that exceeds 25% of the annual budget is excessiᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚve. Other economists do not share this view.

Only a monumental downturn in the economy or, possibly, a very rare circumstance during a time of war would prevent the U.S. government from repaying its short- or 澳洲幸运5官方开奖结果体彩网:long-term debts.

However, even such events are unlikely to result in the U.S. government defaulting, since it has the ability to print additional money (澳洲幸运5官方开奖结果体彩网:monetary policy) or increase taxes (澳洲幸运5官方开奖结果体彩网:fiscal policy) if additional capital is needed.

Long-Term Bonds Have Other Risks

Interest Rate Risk

All bonds have♓ interest rate risk, which is the risk of a loss of value if inter🅰est rates increase.

When interest rates change, the prices of bonds also change, but they m🍰ove in the opposite direction. And the magnitude of 𓆏these moves correlates to maturity.

That is, the longer the maturity of a bond, the greater t♔h😼e price volatility due to changing interest rates.

Conversely, the price change for very short Treasuries, such as Treasury bills which have maturities of under a year, is relatively minor. In fact, that's why T-bills are called cash equivalents.

So the risk of a substantial change in value for long-term bonds is real. A general estimate is that a rise in yield of 100 basis points, or, say from 4% to 5%, causes an approximate 10% loss of principal for a 30-year bond.

Inflation Risk

With regard to long-term bonds that investors hold on to, 💙persistent inflation erodes the value of the interest and priꦇncipal payments over extended periods of time.

That, in turn, reduces your investment return.

Rising in🐲flation also affects the value of bonds. When inflation rises, interest rates rise. And, as explained above, as interest⛄ rates rise, prices for outstanding bonds fall.

The Opportunity Cost

Normally, long-term bonds offer higher returns than those with s♔horter maturiti𝄹es.

However, due to the perceived risk-free appeal of ongoing interest and principal payments ♑no matter what, long-term bonds offer lower rates of return compared to certain other investments, such as the ꦑstock market.

That means that by investing in long-term bonds, you can lose out on more attractive returns offered by higher yielding securities. This doesn't mean that you should avoid Treasuries. But it suggests that diversification is called for based on financial needs, investment goals, and your 澳洲幸运5官方开奖结果体彩网:risk-return profile.

To illustrate, consider some historical returns. If you'd invested $100 in 1928 in the S&P 500, in 2024 your investment would have been valued at $982,817.

If you'd invested $100 in 1928 in Treasury bonds, in 2024 your investment would have been worth $7,159.45.

The Bottom Line

Long-term U.S. government bonds are considered to be risk free as far as payments of interest and principal are concerned. That's due to the ongoing stability of the U.S. government and its long history of always paying its debt obligations.

However, long-term Treasuries have other risks, including interest rate risk, the risk that inflation will erode the value of income received over time, and the risk that you'll miss out on more attractive yield opportunities.