Are Government Bonds Risk-Free?

Government bonds, also known as Treasury bonds or T-bonds, are issued and backed by the federal government. When you buy one, you're effectively loaning money to the U.S. Department of the Treasury. You'll then be repaid over time with interest, which is paid at a fixed rate every six months until the bond matures.

Can You Lose Money With Government Bonds?

It's always possible to lose money when investing, but the chance of that happening with a government bond is close to zero. The U.S. government has an excellent history of repaying its debts, so you can count on your investment being safe.

With that said, returns for government bonds tend to be lower when compared to stocks, exchange-traded funds (ETFs) and mutual funds. Over the last century, the stock market has generated average annual returns of around 10%. Contrast that with the interest rate on 30-year Treasury bonds, which is 3.625% (or 3.875% for 20-year Treasury bonds) at the time of this writing.

Before getting started, here are some key bond terms to know:

Face value (or par value): The bond's value when it's first issued and the amount the bondholder will get back when the bond matures.
Coupon rate: The interest rate the bond pays, which is typically fixed. An auction process determines the coupon rate and offer price for Treasury bonds.
Yield: The return generated by the bond based on its current price.

How to Buy and Sell Government Bonds

To buy a Treasury bond, you must place a bid when the bond becomes available via auction. You can do this through TreasuryDirect.gov or a bank, broker or dealer. Auctions take place four times a year for original issues, and eight times a year for reopenings.

Are There Any Other Risks With Government Bonds?

Barring the remote chance of government destabilization, you shouldn't lose money on government bonds—but there are other financial risks to look out for:

You might net higher returns with other investments. Government bonds are low-risk investments that generate modest gains. The goal is to diversify your holdings with a variety of asset classes. That may mean sprinkling in some riskier investments to find the right balance.

Inflation can diminish your returns. Thanks to inflation, the fixed interest payments you receive from a government bond probably won't buy as much as the years go on—especially if you hold the bond for 20 or 30 years.

Interest rates can change. When the federal funds rate goes up, bond prices tend to go down, and vice versa. Holding a bond for decades could expose you to interest rate risks. Again, diversification is key. Including short-term bonds and equities (stocks) in your portfolio can help mitigate risk.

Alternatives to Government Bonds

Due to the low yields of government bonds, it's a good idea to make sure your investment portfolio is diversified with other types of investments. Some other investments you may explore include:

Other Government Debt Securities

Treasury notes: These government-backed investments come in terms of two, three, five, seven or 10 years. Interest is fixed and paid out every six months. The interest rate on a 10-year note is currently 3.875%.
Treasury bills: These have an even shorter timeline that ranges anywhere from four weeks to one year. Interest is paid when the bill matures.
Series I savings bonds: These savings bonds use a combination of two interest rates—one that's fixed and another that fluctuates based on inflation. They're available in 30-year terms and currently offer a composite rate of 4.30%.
Series EE savings bonds: These can earn interest for three decades, and the value is guaranteed to double after 20 years. The rate for series EE bonds purchased until October 31, 2023 is 2.50%.

Certificates of Deposit (CDs)

The money you put into a CD will earn interest, but you're agreeing to give up access to your funds for a predetermined amount of time. Making withdrawals before the term ends usually results in a fee. Terms commonly range anywhere from three months to five years. On the high end, some CD rates are currently in the 5.5% range. CDs held at banks are FDIC-insured for up to $250,000 per depositor, per insured account. Credit unions offer similar protections.

Money Market Accounts

A money market account earns interest like a savings account and allows you to withdraw funds via check or debit card. Like CDs, money market accounts are insured by the FDIC (or NCUA if the account is held at a credit union). Interest rates are currently over 5%. Just keep in mind that some financial institutions may limit account holders to six convenient withdrawals per month.

High-Yield Savings Accounts

This type of account works like a traditional savings account—except that annual percentage yields (APYs) tend to be much higher. Some high-yield savings accounts currently offer yields that exceed 5%. Like a money market account, funds are insured up to a certain point, and convenient withdrawals may be limited.

Stocks

Individual stock picking is especially risky, but there are safer ways to invest in stocks. ETFs and mutual funds both allow you to purchase groups of securities in one fell swoop. That provides built-in diversification and can help mitigate investment risk. You can also invest in stocks through a 401(k), IRA or other retirement account.

The Bottom Line

No investment is ever 100% risk-free, but government bonds are about as safe as it gets. That's because they're backed by the full faith of the U.S. government. Gains tend to lag behind higher-risk investments, but government bonds can help diversify your portfolio and provide reliable returns.

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FAQs

Are government bonds risk-free? ›

Treasury bonds are widely considered a risk-free investment because the U.S. government has never defaulted on its debt. However, investors should understand that even U.S. government bonds have interest rate risk. That is, if market interest rates rise, the prices of these bonds will fall, as they did throughout 2022.

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Why are US Treasury bonds considered to be safe multiple choice question? ›

Treasury securities are considered a safe and secure investment option because the full faith and credit of the U.S. government guarantees that interest and principal payments will be paid on time.

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Why are US treasury bonds not completely riskless? ›

Key Takeaways

The U.S. government has an excellent credit rating and repayment history, and is able to "print" money as necessary to service existing debt obligations. There are, however, other risks such as interest rate risk, the effects of inflation, and opportunity costs.

Are government bonds referred to as risk-free because they are generally free of credit risk? ›

In the U.S., the federal government has never defaulted on its debt, and the government could theoretically create more money or raise taxes in order to pay for the interest on existing debts to avoid default. Therefore, Treasuries carry what is known as the risk-free rate of return.

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Are treasury bills really risk-free? ›

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.

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What are the safest government bonds to buy? ›

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.

Should I buy US treasury bonds now? ›

Fed rate policy's impact on your investing

Answer: Now may be the perfect time to invest in bonds. Yields are at levels you could only dream of 15 years ago, so you'd be locking in substantial, regular income. And, of course, bonds act as a diversifier to your stock portfolio.

Are Government Bonds Risk-Free? - Experian (2024)

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