What is a Long Bond
The long bond is a 30-year U.S. Treasury Bond (T-Bond), the bond with the most extended maturity issued by the U.S. Treasury.
The long bond, like all U.S. Treasury Bonds, pays interest semi-annually and is backed by the full might of the U.S Treasury. As a result, long bonds have a low default risk.
BREAKING DOWN Long Bond
A long bond is considered one of the safest securities, and are among the most actively traded bonds in the world. They attract substantial interest from international buyers during uncertain global economic times.
Yields are essentially the price the government pays to borrow money for different lengths of time. For example, a $30,000 Treasury bond with a 2.75 percent yield provides an $825 annual return on investment. And if held to maturity, the government will return all $30,000 to the bondholder.
Pros and Cons of T-Bonds
In addition to the backing of the U.S. Treasury, another principal advantage of long bonds securities is their liquidity. Their market is large and extremely active, making them easy to buy or sell. The public can purchase long bonds directly from the government without going through a bond broker. Long bonds are also available in many mutual funds.
The security and minimal risk of long bonds, however, contributes to their disadvantages. Their yields tend to be relatively low in contrast to corporate bonds. Investors in corporate bonds thus have the potential to receive more income from the same principal investment. The higher yield compensates investors for taking on the risk that a corporate issuer will default on its debt obligations.
It’s hard to predict how financial markets and the economy will perform over a 30-year period. Interest rates, for example, can change significantly in just a few years, so what looks like a good yield at the time of purchase might not seem as beneficial in 10 or 15 years. Inflation can also reduce the buying power of the dollars invested in a 30-year bond. To offset these risks, investors typically demand higher yields—meaning 30-year bonds usually pay higher returns than shorter-term bonds.
When interest rates go up, all bond prices go down, as new bonds can offer higher yields than existing bonds. Given long bonds’ time to maturity, their price often drops more substantially than does bonds with shorter maturities. And for foreign investors, long Treasury bonds carry currency risk because they are denominated in U.S. dollars.