Are Treasury bonds risky?

Over long term, inflation poses biggest uncertainty

Question: I can buy a 30-year Treasury bond and get a 3.3% yield. Is this really a risk-free investment?

Answer: Not quite. There are three main risks to bond investing: interest rate fluctuations, inflation and default risk.

Treasury bonds aren’t realistically prone to default risk. It’s not impossible for the U.S. government to default on its obligations, but the chances are minuscule. On the other hand, the other two risk factors certainly apply to long-term Treasury bonds.

If you hold the bond for its entire 30year life span, you’ll get your initial investment back. In the meantime, however, the market value of your Treasury bond can go up and down. Specifically, if market interest rates are higher than your bond’s coupon rate, you can expect the bond to have a lower resale value than what you paid for it — which can present a problem if you need to sell.

Finally, inflation risk is the part I’d be most concerned with. Think of it this way: If inflation is 2%, your 30-year Treasury bond produces a “real” return of 3.3% minus 2%, or just 1.3% after inflation. If inflation were to spike to say, 4%, your bond’s real return would turn negative. Plus, the $1,000 you’ll get back in 30 years will be worth significantly less than when you bought the bond.

The bottom line? A long-term Treasury bond can provide you with worryfree income for years, but that doesn’t make it a risk-free investment.