Are long-term U.S. government bonds risk-free?

Bonds / Fixed Income
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Historically, US government bonds have been considered "risk free" because the US government has never defaulted on its bonds.

However, that only addresses one dimension of risk, which is the risk of default.

When you purchase a bond, it's price will fluctuate based on a number of factors including interest rates. When interest rates rise, the price of the bond falls. When interest falls, the price of the bond rises. Hence, should you need to trade your bond, you could book a profit or a loss depending on what's happening in the market. That is true for US government bonds as well as any other bond.

Back to default risk. Even though the US has never defaulted on its bonds, its credit rating was reduced by Standard & Poors on August 5, 2011, indicating that there was a slightly higher risk of default as a result of Capital Hill politics. The rating has since been restored to AAA. It serves, however, to highlight the fact that even the bonds of the mightiest economy in the world could still be subject to default risk.

In summary, the traditional view that US government bonds are risk-free only addresses the risk of default. On that measure, most people consider the US to be (pretty) safe.

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December 2004
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