Can you lose money on government bonds?
Key Takeaways. Bonds are often touted as less risky than stocks—and for the most part, they are—but that does not mean you cannot lose money owning bonds. Bond prices decline when interest rates rise, when the issuer experiences a negative credit event, or as market liquidity dries up.
Bonds are generally considered a less-risky complement to the volatility of stocks in an investment portfolio. U.S. Treasurys, and specifically Treasury bills and Treasury notes, are the benchmark for a nearly risk-free investment if held to maturity.
An investor therefore will potentially earn greater returns on longer-term bonds, but in exchange for that return, the investor incurs additional risk. Every bond also carries some risk that the issuer will “default,” or fail to fully repay the loan.
Treasury bonds are considered risk-free assets, meaning there is no risk that the investor will lose their principal. In other words, investors that hold the bond until maturity are guaranteed their principal or initial investment.
The No. 1 advantage that T-bills offer relative to other investments is the fact that there's virtually zero risk that you'll lose your initial investment. The government backs these securities so there's much less need to worry that you could lose money in the deal compared to other investments.
“Yields are fairly high now, and high-quality bonds that you hold to maturity are safe investments,” he said. Mr. Pozen added that well-diversified investment-grade bond funds make sense now, too, for prudent investors who are prepared to hold them for at least three years.
Treasury bonds are widely considered a risk-free investment, as they have extremely low odds of default since they are backed fully by the U.S. government.
Bonds are considered a low-risk investment because the federal government fully backs them, not banks. They tend to be long-term investments and are considered a great way to diversify your investment portfolio.
Investors seeking stability in a recession often turn to investment-grade bonds. These are debt securities issued by financially strong corporations or government entities. They offer regular interest payments and a smaller risk of default, relative to bonds with lower ratings.
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|---|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
What happens to Treasury bonds if the market crashes?
Even if the stock market crashes, you aren't likely to see your bond investments take large hits. However, businesses that have been hard hit by the crash may have a difficult time repaying their bonds.
Opportunity cost. Having too much of your portfolio in government bonds could mean missing big gains in the stock market.
Treasuries. Treasury securities like T-bills and T-notes are very low-risk as they're issued and backed by the U.S. government. They provide a safe way to earn a return, albeit generally lower than aggressive investments.
- High-yield savings accounts.
- Money market funds.
- Short-term certificates of deposit.
- Series I savings bonds.
- Treasury bills, notes, bonds and TIPS.
- Corporate bonds.
- Dividend-paying stocks.
- Preferred stocks.
U.S. Treasury bonds are generally more stable than stocks in the short term, but this lower risk typically translates to lower returns, as noted above. Treasury securities, such as government bonds, notes and bills, are virtually risk-free, as the U.S. government backs these instruments.
CDs are paying higher rates than Treasury bills and Treasury notes for terms of one to five years. Treasuries are exempt from state income taxes, which is an important advantage when rates are nearly the same.
Taxes: Treasury bills are exempt from state and local taxes but still subject to federal income taxes. That makes them less attractive holdings for taxable accounts. Investors in higher tax brackets might want to consider short-term municipal securities instead.
While interest rates and inflation can affect Treasury bill rates, they're generally considered a lower-risk (but lower-reward) investment than other debt securities. Treasury bills are backed by the full faith and credit of the U.S. government. If held to maturity, T-bills are considered virtually risk-free.
3 Month Treasury Bill Rate is at 5.23%, compared to 5.22% the previous market day and 4.64% last year. This is higher than the long term average of 4.19%. The 3 Month Treasury Bill Rate is the yield received for investing in a government issued treasury security that has a maturity of 3 months.
| ETF | Expense ratio | Yield to maturity |
|---|---|---|
| iShares Aaa – A Rated Corporate Bond ETF (QLTA) | 0.15% | 5% |
| Schwab Short-Term U.S. Treasury ETF (SCHO) | 0.03% | 4.3% |
| Schwab Intermediate-Term U.S. Treasury ETF (SCHR) | 0.03% | 3.9% |
| Schwab Long-Term U.S. Treasury ETF (SCHQ) | 0.03% | 4.1% |
What is a disadvantage of government bonds?
Fixed-rate government bonds can have interest rate risk, which occurs when interest rates are rising and investors are holding lower paying fixed-rate bonds as compared to the market.
T-bills are exposed to less risk of inflation, as they will be paid in full in a shorter period of time. Conversely, Treasury bonds have maturities of significantly longer duration, which exposes them to higher inflation risk over the lifespan of the bond.
GOVERNMENT BONDS
Intermediate-term bonds mature in three to 10 years, whereas long-term bonds generally mature in 10 to 30 years. Risk Considerations: Among the lowest risk of all bond investments, these bonds have low credit risk because they are backed by the full faith and credit of the U.S. government.
Bonds offer a fixed, predictable income from interest. They are also more liquid and may see greater returns than CDs. However, if you're looking for a highly secure and easy way to earn interest, CDs may be more suitable to your goals.
Bond returns have consistently exceeded the returns of cash and cash equivalents. From 2008-2022, bonds outperformed cash by a 2.1% annual average. While 2022 was the worst-performing year in the modern history of the bond market, the year's results failed to offset the outperformance of the preceding 15 years.
