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

Bonds / Fixed Income
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4 weeks ago
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No, every type of investment involves some level of risk. People in the financial industry refer to the “risk free rate of return” and that figure is often represented by some sort of short term US Government security.

US Government securities, also known as treasury securities, are amongst the most conservative investments options available. These types of investments entail a much lower level of risk compared to traditional stock and bond investing.

The reason US Government securities are considered to have such low risk is because they are backed by the US Government and its authority to levy taxes. It is very unlikely that the US Government will default. However, because these investments entail very little risk, there isn’t much opportunity to generate much of a return.

Another way to reduce risk is by reducing the holding term, known as maturity. A Treasury Bill has the shortest maturity, usually one year or less, and therefore has the least risk. A Treasury Note matures between 2 – 10 years and a Treasury Bond (US Government Bond) between 10 – 30 years. The longer you hold a bond, the more risk there is associated with fluctuations in interest rates.

When interest rates go up (like they have recently), the price of bonds will go down. The longer the maturity of the bond, the more negatively the price will be impacted.

 

Stephen Rischall, CRPC

5 days ago
5 days ago
October 2016
October 2016