Pros and Cons of Investing in Treasury Bonds (2024)

Pros and Cons of Investing in Treasury Bonds (1)

Treasury bonds are often considered the bedrock of conservative investment portfolios. These are U.S. government bonds that offer a unique combination of safety and steady income. But while they are lauded for their security and reliability, potential drawbacks such as interest rate risk, low returns and inflation risk must be carefully considered. If you’re interested in investing in Treasury bonds or have other questions about your portfolio, consider speaking with a financial advisor.

What Is a Treasury Bond?

A Treasury bond is a long-term, fixed-income security issued by the U.S. Department of the Treasury. Its primary function is to facilitate the government’s borrowing needs, enabling it to fund various public expenditures. When you purchase a Treasury bond, you are essentially lending money to the government. In return, the government promises to pay you back with interest over a period of 20 to 30 years.

Interest payments on Treasury bonds are made semi-annually, and the rate is fixed at the time of issuance. This fixed rate, known as the coupon rate, ensures that investors receive a consistent income, regardless of fluctuations in the market interest rates.

For example, a Treasury bond with a $1,000 face value and a 5% coupon rate will pay $50 in interest each year until maturity. The coupon payments are typically made semi-annually, meaning the investor would receive $25 every six months. Upon maturity, the investor is repaid the bond’s face value, the initial investment amount.

The price of Treasury bonds in the secondary market, however, can fluctuate based on changes in interest rates and other economic factors, offering opportunities for traders to capitalize on price movements. If the market interest rates rise, new bonds may be issued with a higher coupon rate, say 6%, making our original bond less attractive. Consequently, the price of our bond in the secondary market might decrease to, say $950, to compensate for the lower coupon rate compared to new issues.

Pros of Investing in Treasury Bonds

Pros and Cons of Investing in Treasury Bonds (2)

Treasury bonds have been a fundamental part of investment strategies since their extensive use by the U.S. government during World War II to finance military expenditures. While their historical context is notable, today’s investors are more interested in the current advantages they offer. These include:

Safety and security: Treasury bonds, backed by the “full faith and credit” of the U.S. government, offer a high level of safety. The historical default rate for U.S. Treasury bonds is effectively zero, which speaks to their reliability. This makes them particularly appealing to conservative investors and those nearing retirement who prioritize capital preservation, although it’s important to remember that no investment is entirely risk-free

Dependable income: Treasury bonds provide fixed interest payments, known as coupon payments, twice a year. This predictable income is invaluable for financial planning, allowing investors to forecast their income and plan for future expenses. For retirees, who often rely on investment income to cover living expenses, Treasury bonds are a popular choice due to their stable and predictable payments.

Tax benefits: The interest income from Treasury bonds is subject to federal income tax but exempt from state and local income taxes. This can be particularly beneficial for investors in high-income tax states, as it allows them to avoid additional taxation on their interest income.

Liquidity: Treasury bonds are highly liquid, allowing investors to buy or sell them easily without significantly impacting the price. The U.S. Treasury market is the largest and most liquid government securities market globally, with substantial daily trading volumes. This liquidity means that investors can access their funds quickly if needed, though it’s worth noting that selling before maturity could result in capital gains or losses depending on the interest rate environment.

Hedge against market volatility: Treasury bonds are considered safe haven assets, often retaining or increasing in value during market turbulence. However, it’s essential to ensure that the language used does not imply that past performance will predict future results. Treasury bonds can serve as an effective hedge against market volatility, providing stability and security that can offset losses in other portfolio areas.

Cons of Investing in Treasury Bonds

The safety of Treasury bonds does not insulate investors from other types of financial risks. Therefore, investors should also consider potential drawbacks:

Interest rate risk: As interest rates ascend, the value of existing bonds with lower interest rates tends to diminish, potentially leading to capital losses if the bonds are sold prior to maturity. This risk underscores the importance of understanding the inverse relationship between bond prices and interest rates, akin to a seesaw, where an increase in one results in a decrease in the other. Those who sell their bonds before maturity during a period of rising interest rates may receive less than the bond’s face value, incurring a loss.

Inflation risk: Inflation erodes the purchasing power of the fixed interest payments from bonds over time. The concept of “real return,” which is the nominal return adjusted for inflation, is critical in understanding the impact of inflation on investments. For example, if the nominal yield on a Treasury bond is 3% and inflation is 2%, the real return is a mere 1%.

Opportunity cost: Opportunity cost is a way to think about the potential benefits an investor misses out on when they choose one asset or strategy over another. Investing in Treasury bonds might mean relinquishing the potential higher returns from stock market investments. The potential for missing out on higher returns is particularly pronounced when other asset classes, such as stocks or real estate, are performing robustly. Diversification can help mitigate this risk, but it also means holding assets that may have lower returns than the best-performing asset class.

Other Types of Treasuries

Pros and Cons of Investing in Treasury Bonds (3)

Investors often seek out Treasury securities for their relative safety and stability, but their financial goals and investment strategies can vary widely. While Treasury bonds are a go-to for long-term investment, it’s important to understand the full spectrum of options available through the U.S. Treasury. These include Treasury bills, Treasury notes, Treasury Inflation-Protected Securities (TIPS) and I-bonds, each catering to different investment horizons and risk profiles.

Treasury Bills

Treasury bills, or T-bills, are a straightforward, short-term investment option, maturing in one year or less. Investors purchase them at a cost below their face value, and when the bond reaches maturity, the U.S. government repays the full face value. The difference between the purchase price and the maturity value is the investor’s profit. T-Bills are highly regarded for their security, backed by the government’s promise, making them a solid choice for those seeking a reliable, short-term investment solution with minimal risk.

Treasury Notes

For those with a longer investment horizon, Treasury notes serve as a bridge between short-term T-bills and long-term Treasury bonds. Treasury notes, or T-notes, have terms that run from two to 10 years, and they can complement a diversified portfolio by providing a steady income stream through semi-annual interest payments. While T-notes are generally seen as a safe investment, they are not immune to market fluctuations and interest rate risks, which can affect their value.

Treasury Inflation-Protected Securities (TIPS)

In an economic environment where inflation is a concern, TIPS can be a strategic addition to an investment portfolio. These securities are directly tied to the Consumer Price Index, which means they adjust to maintain purchasing power in the face of rising prices. Interest is paid semi-annually on the adjusted principal, so if inflation rises, both the principal value of the TIPS and the interest payments increase. For long-term investors worried about inflation diminishing the value of their savings, TIPS may offer a sense of security. The adjustment mechanism of TIPS is a unique feature that ensures the principal value increases with inflation, which also causes interest payments to rise.


These securitiesare similar to TIPS as they also protect against inflation. But they do it a little differently. The interest rate for an I-Bond is made up of a fixed rate that is set when it gets issued and a variable rate that adjusts semi-annually based on changes in inflation. This provides a combined return that helps to preserve the purchasing power of the investment.

Bottom Line

Treasury bonds are viewed as a secure and stable investment option, offering a predictable income stream and serving as a hedge against market volatility, which can be particularly appealing to conservative investors and those with long-term financial goals. However, they are not without their drawbacks, such as interest rate and inflation risks, and generally offer lower returns when compared with other investments, highlighting the importance of opportunity cost.

Tips for Investing in Bonds

  • While Treasuries are one type of fixed-income security, there are other types of bonds that may fit your needs as an investor. For example, municipal bonds generate tax-free interest. Corporate bonds, on the other hand, often pay more interest than government bonds, but carry more risk. Familiarize yourself with the various types of bonds and how they work so you can select securities that align with your goals and risk tolerance.
  • If you need help investing in bonds and managing risk with more conservative investments, consider working with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you canhave a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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Pros and Cons of Investing in Treasury Bonds (2024)


Pros and Cons of Investing in Treasury Bonds? ›

Investing in Treasury bonds has its advantages, such as low risk, stable income, and tax benefits, but it also comes with disadvantages, such as low returns, inflation risk, and interest rate risk.

What are the pros and cons of Treasury bonds? ›

These are U.S. government bonds that offer a unique combination of safety and steady income. But while they are lauded for their security and reliability, potential drawbacks such as interest rate risk, low returns and inflation risk must be carefully considered.

What are the pros and cons of investing in bonds? ›

Con: You could lose out on major returns by only investing in bonds.
Can offer a stream of incomeExposes investors to credit and default risk
Can help diversify an investment portfolio and mitigate investment riskTypically generate lower returns than other investments
1 more row

What are the advantages and disadvantages of treasury bills? ›

Pros and Cons

T-bills pay a fixed rate of interest, which can provide a stable income. However, if interest rates rise, existing T-bills fall out of favor since their return is less than the market.

Is it a good idea to invest in treasury I bonds? ›

The pros of investing in I-bonds

In fact, I-bonds often outperform many of the highest-performing stocks as well during inflationary periods. These Treasury-issued bonds generate high returns without all the risks of those other high-yielding investments because they're backed by the U.S. government.

What are 3 advantages and disadvantages of bonds? ›

Bonds have some advantages over stocks, including relatively low volatility, high liquidity, legal protection, and various term structures. However, bonds are subject to interest rate risk, prepayment risk, credit risk, reinvestment risk, and liquidity risk.

What are the risks of Treasury bonds? ›

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.

What are the cons of investing in bonds? ›

Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest. Only taxable accounts are allowed to invest in I bonds (i.e., no IRAs or 401(k) plans).

What is the downside of investing in bonds? ›

What are the disadvantages of bonds? Although bonds provide diversification, holding too much of your portfolio in this type of investment might be too conservative an approach. The trade-off you get with the stability of bonds is you will likely receive lower returns overall, historically, than stocks.

What is the downside to bonds? ›

Historically, bonds have provided lower long-term returns than stocks. Bond prices fall when interest rates go up. Long-term bonds, especially, suffer from price fluctuations as interest rates rise and fall.

What are the disadvantages of investing in Treasury bills? ›

  • T-Bills may offer low returns compared with other debt instruments as well as when compared to certificates of deposits (CDs)
  • The T-Bill pays no coupon — interest payments — leading up to its maturity.
  • T-bills can inhibit cash flow for investors who require steady income.
Mar 20, 2023

Why people don t invest in Treasury bill? ›

The biggest downside of investing in T-bills is that you're going to get a lower rate of return compared to other investments, such as certificates of deposit, money market funds, corporate bonds or stocks. If you're looking to make some serious gains in your portfolio, T-bills aren't going to cut it.

Do you pay capital gains on Treasury bonds? ›

Are all bonds taxed? Bonds are divided into two classes: taxable and tax-exempt. A bond's tax-exempt status applies only to the bond's interest income. Any capital gains generated from selling a bond or bond fund before its maturity date is taxable, regardless of the type of bond.

Is my money safe in Treasury bonds? ›

U.S. Treasury bonds are fixed-income securities. They're considered low-risk investments and are generally risk-free when held to maturity. That's because Treasury bonds are issued with the full faith and credit of the federal government.

How much is a $100 savings bond worth after 30 years? ›

How to get the most value from your savings bonds
Face ValuePurchase Amount30-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

Are I bonds still a good investment in 2024? ›

At an initial rate of 5.27%, buying an I bond in April gets roughly 0.2% more compared to the 5.05% 12-month Treasury Bill rate (April 10, 2024). Unlike 2021 and 2022, I Bond rates are more in line with other similar interest rate products.

What are the disadvantages of buying Treasury bonds? ›

Interest rate risks: As are all bonds, Treasury bonds are subject to price volatility as a result of changes in market interest rates. Inflation risk: The interest earned on Treasury securities may not keep pace with inflation (with the exception of Treasury inflation-protected securities, or TIPS).

What is the downside to Treasuries? ›

So, the risks to investing in T-bonds are opportunity risks. That is, the investor might have gotten a better return elsewhere, and only time will tell. The dangers lie in three areas: inflation, interest rate risk, and opportunity costs.

What happens to Treasury bonds when interest rates rise? ›

A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions. When market interest rates rise, prices of fixed-rate bonds fall. this phenomenon is known as interest rate risk.

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