Traditional knowledge has long taught us that US Treasury Bonds are expected to be a few of the safest financial investments around. This might not be the case there is a school of the idea that holds the dangers associated with these instruments are far higher than is widely believed.
The Traditional Argument
The general argument for treasuries is that the United States federal government will never out of service and continuously exist to settle its bonds. The rest of the case goes that the government can always print more cash or raise taxes to meet its obligations. This argument is based on two presumptions: that the federal government will act rationally and meet its requirements.
The problem with this train of thought is that federal governments will not always behave logically. If they did, there would be no such thing as war and no requirement for a military. The other is that federal governments including the US government can default on commitments. This means a few of the security related to bonds might not exist.
Throughout the summer of 2011, the US federal government came extremely close to default or not having sufficient cash to pay off bonds and other responsibilities. As this example proves, all national governments are subject to politics and political leaders hardly ever think about the economic repercussions of their actions.
Treasury Bonds and Inflation
Treasury bonds pay a low rate of interest that is supposed to be close to the average in the bond market. In April 2012 the interest rate on a 30 bond varied from 3.35% to 3.15%.
The problem with this is that the average rate of inflation is around 3%. However, it can range higher. If Steve purchased a bond that paid 2.5% interest and the rate of increase was about 3.5%, he would lose 1% or 1 cent on the dollar each year. If Steve invested $10,000 in treasury bonds in one year, he would $9,990 since of inflation. If the rate of inflation goes higher, Steve can lose more.
There have been times in American history, such as the period right after World War II when the inflation rate has been well over 10%. An individual holding treasury bonds at that time could have lost 10% of the value of her investment. That is the worst case situation however even an average rate of inflation can destroy bonds worth.
Not a Good Long-Term Investment
The moral of the story is that Treasury bonds are not a good long-term investment nor are they a great retirement investment. The threat from inflation is merely undue. Individuals investing long term will require something that pays a return higher than inflation.
That preparation for return has to look beyond treasury bonds. There are lots of other secure financial investments out there that offer a far better rate of return.
Treasury bonds pay a low rate of interest that is expected to be close to the average in the bond market. The issue is that this rate is frequently so low that the return on the bonds can be less than the rate of inflation. In April 2018 the interest rate on a 30 bond ranged from 3.35% to 3.15%. Returns on a 20-year bond were worse ranging from 3% to 2.76%.
If Steve bought a bond that paid 2.5% interest and the rate of inflation was around 3.5%, he would lose 1% or 1 cent on the dollar annually.