Long Bond: What it is, How it Works, Pros and Cons

What Is a Long Bond?

Long bonds refer to the longest maturity bond offering from the U.S. Treasury. It can also carry over to the traditional bond markets to include the longest-term bond available from an issuer. The longest maturity offering from the U.S. Treasury is the 30-year bond which follows the 10-year bond. In 2020, the U.S. Treasury began issuing a 20-year bond.

The U.S. Treasury’s 30-year long bond pays interest semi-annually. Like all U.S. Treasury bonds, it is backed by the full faith and credit of the U.S Treasury, which leads to a very low default risk.

Key Takeaways

  • Long bond is often a term used to refer to the longest maturity bond offering from the U.S. Treasury, the 30-year Treasury bond.
  • It can also carry over to the traditional bond markets to include the longest-term bond available from an issuer.
  • Investing in the long bond Treasury and other corporate long bonds comes with a focus on investing for long-term yield which has its own risks as well as higher rewards.

Long Bonds Explained

Long bonds offer a maturity date far out on the investment horizon. For the U.S. Treasury market, this includes the 30-year Treasury which has the longest maturity of all offerings. Corporate bonds, however, can issue maturities in different variations. Corporate bonds may offer maturities of 15, 20, or 25 years. Generally, the longest available maturity offering from an issuer may be referred to as the long bond.

The Treasury’s long bond is considered one of the safest securities and is among the most actively traded bonds in the world. The yield on the U.S. Treasury is essentially the price the government pays to borrow money from its investors. For example, a $30,000 Treasury bond with a 2.75% yield provides an $825 annual return on investment. If held to maturity, the government will also return all $30,000 to the bondholder.

Historical yields on the 30-year U.S. Treasury have included the following:


Long-Term Yields

In a healthy economy, yield curves on bonds are typically normal with longer-term maturities paying higher yields than shorter-term maturities. Long bonds offer one advantage of a locked-in interest rate over time. However, they also come with longevity risk. When an investor holds a long-term bond, that investor becomes more susceptible to interest rate risk since interest rates could potentially increase over a long-term period.

Fundamentally, when interest rates go up, bond prices go down. This is because new bonds can offer higher yields than existing bonds. Discounting existing bond cash flows at the higher yield results in a lower price.

If rates do increase, the investor makes less on the bond they own and that bond’s price also falls in the secondary market, making it worth less for trading. Given long bonds’ time to maturity, their price often drops more substantially than do bonds with shorter maturities because there are more discounted payments involved. An investor who buys longer-term bonds is therefore usually compensated with somewhat of a higher yield because of the longevity risk they are willing to take on.

The bond market can generally be broken into five categories:

  • Treasuries
  • Municipals
  • Investment-grade bonds
  • Intermediate-grade bonds
  • High-yield junk bond

Each category of bonds comes with its own characteristics and risks. High yield junk bonds are the riskiest of all bonds and thus offer the highest yields. Moreover, long bonds in this category offer investors a higher yield on the long end because of the added compensation for holding them to a longer maturity date.

In general, 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 for any type of bond at the time of purchase might not seem as beneficial 10 or 15 years down the road. Inflation can also reduce the buying power of the dollars invested in a 30-year bond. To offset these risks, all investors usually demand higher yields for longer-term maturities—meaning 30-year bonds usually pay higher returns than shorter-term bonds from an issuer or in any category.

Pros and Cons of Treasury Bonds

The backing of the U.S. Treasury makes Treasury bonds the most secure bond investment across the bond market. Another principal advantage of Treasuries and the long Treasury bond in particular is liquidity. The secondary market for Treasuries is large and extremely active, making them easy to buy and sell on any given trading day. 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. In general, investors will have an easier time buying and selling the U.S. Treasury long bond on a daily basis vs. other types of long bonds in the market.

The security and minimal risk of the Treasury long bond, however, can lead to disadvantages. Yields tend to be relatively low in contrast to corporate long 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 possibly default on its debt obligations. This pushes the long bond corporate yields out even further when factoring in the longevity risks.

Article Sources
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  1. U.S. Department of the Treasury. "Daily Treasury Yield Curve Rates." Accessed Feb. 4, 2021.

  2. U.S. Department of the Treasury. "Treasury To Issue New 20-Year Bond In First Half of 2020." Accessed Feb. 4, 2021.

  3. TreasuryDirect. "Treasury Bonds: Rates & Terms." Accessed Feb. 4, 2021.

  4. U.S. Department of Treasury. "Daily Treasury Yield Curve Rates." Accessed Feb. 4, 2021.

  5. U.S. Securities and Exchange Commission. "Interest rate risk — When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall," Page 1. Accessed Feb. 4, 2021.

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