The Risks and Rewards of Treasury Bonds

The Risks and Rewards of Treasury Bonds

We've talked before about the different types of bonds. One of the most popular are federal government bonds, commonly called treasury bonds or treasuries. These can be a useful investment tool, but they are not without risks.

What's Good About Treasuries?

The primary reason that people buy treasury bonds is security. These bonds are backed by the United States government, so it's very unlikely that they will default on the bonds and not pay them back. They don't yield as much as some other types of bonds, but long-term bonds can regularly beat out other cash investments like certificates of deposit.

What's the Risk Then?

Ultimately, the big risk when investing in treasury bonds is inflation. Earning 4% on your money for the next 30 years might sound pretty good right now, but what if inflation roars up to 5%. Now your money is actually shrinking every year and it's locked up. Meanwhile the government will be selling new bonds at much higher rates and yours will pale in comparison. This risk is the basis for the bond market.

Like many investments, treasuries can seem very safe before you factor in inflation. While they offer security and positive returns, those returns may not still be positive after factoring in the money inflation is eating away. You should definitely consider including treasury bonds in your portfolio, but view them with the same skepticism you would any other investment.

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Mark's picture

Mark wrote:

Wed, 01/19/2011 - 06:17 Comment #: 1

That's why I like T bills and other short term securities. You don;t have to hold them for 10 to 30 years like U.S. Treasuries.

Kevin's picture

Kevin wrote:

Wed, 01/19/2011 - 07:05 Comment #: 2

Very true - too often, investors invest in bonds thinking that there is no risk but as you point out, inflation is certainly one risk to consider. Investors also have the option of investing in Treasury Inflation-Protected Securities ("TIPS"), which seek to combat the effects of inflation by adjusting the principal in accordance with CPI, but paying a lower coupon rate. Perhaps this is something for a future post?
Best regards,

MoneyCone's picture

MoneyCone wrote:

Thu, 01/20/2011 - 22:10 Comment #: 3

iBonds and Inflation protected treasuries to the rescue!

You can also opt for an ibond as your tax refund.

Weekend Reading 1/29/2011 — Dividend Monk's picture

Weekend Reading 1/29/2011 — Dividend Monk wrote:

Sat, 01/29/2011 - 12:29 Comment #: 4

[...] The Risks and Rewards of Treasury Bonds Momvesting outlines the basic points to keep in mind when investing in treasuries. [...]