Long bonds refer to the longest maturity bond offering from the U.S. Treasury. It can also carry over to the traditional bond markets to include the longest-term bond available from an issuer. The longest maturity offering from the U.S. Treasury is the 30-year bond which follows the 10-year bond. In 2020, the U.S. Treasury began issuing a 20-year bond.
The U.S. Treasury’s 30-year longbond pays interest semi-annually. Like all U.S. Treasury bonds, it is backed by the full faith and credit of the U.S Treasury, which leads to a very low default risk.
Key Takeaways
Long bond is often a term used to refer to the longest maturity bond offering from the U.S. Treasury, the 30-year Treasury bond.
It can also carry over to the traditional bond markets to include the longest-term bond available from an issuer.
Investing in the long bond Treasury and other corporate long bonds comes with a focus on investing for long-term yield which has its own risks as well as higher rewards.
Long bonds offer a maturity date far out on the investment horizon. For the U.S. Treasury market, this includes the 30-year Treasury which has the longest maturity of all offerings. Corporate bonds, however, can issue maturities in different variations. Corporate bonds may offer maturities of 15, 20, or 25 years. Generally, the longest available maturity offering from an issuer may be referred to as the long bond.
The Treasury’s long bond is considered one of the safest securities andis among the most actively traded bonds in the world. The yieldon the U.S. Treasury is essentially the price the government pays to borrow money from its investors. For example, a $30,000 Treasury bond with a 2.75% yield provides an $825 annual return on investment. If held to maturity, the government will also return all $30,000 to the bondholder.
Historical yields on the 30-year U.S. Treasury have included the following:
In a healthy economy, yield curves on bonds are typically normal with longer-term maturities paying higher yields than shorter-term maturities. Long bonds offer one advantage of a locked-in interest rate over time. However, they also come with longevity risk. When an investor holds a long-term bond, that investor becomes more susceptible to interest rate risk since interest rates could potentially increase over a long-term period.
Fundamentally, when interest rates go up, bond prices go down. This is because new bonds can offer higher yields than existing bonds. Discounting existing bond cash flows at the higher yield results in a lower price.
If rates do increase, the investor makes less on the bond they own and that bond’s price also falls in the secondary market, making it worth less for trading. Given long bonds’ time to maturity, their price often drops more substantially than do bonds with shorter maturities because there are more discounted payments involved. An investor who buys longer-term bonds is therefore usually compensated with somewhat of a higher yield because of the longevity risk they are willing to take on.
The bond market can generally be broken into five categories:
Treasuries
Municipals
Investment-grade bonds
Intermediate-grade bonds
High-yield junk bond
Each category of bonds comes with its own characteristics and risks. High yield junk bonds are the riskiest of all bonds and thus offer the highest yields. Moreover, long bonds in this category offer investors a higher yield on the long end because of the added compensation for holding them to a longer maturity date.
In general, it’s hard to predict how financial markets and the economy will perform over a 30-year period. Interest rates, for example, can change significantly in just a few years, so what looks like a good yield for any type of bond at the time of purchase might not seem as beneficial 10 or 15 years down the road. Inflation can also reduce the buying power of the dollars invested in a 30-year bond. To offset these risks, all investors usually demand higher yields for longer-term maturities—meaning 30-year bonds usually pay higher returns than shorter-term bonds from an issuer or in any category.
Pros and Cons of Treasury Bonds
The backing of the U.S. Treasury makes Treasury bonds the most secure bond investment across the bond market. Another principal advantage of Treasuries and the long Treasury bond in particular is liquidity. The secondary market for Treasuries is large and extremely active, making them easy to buy and sell on any given trading day. The public can purchase long bonds directly from the government without going through a bond broker.
Long bonds are also available in many mutual funds. In general, investors will have an easier time buying and selling the U.S. Treasury long bond on a daily basis vs. other types of long bonds in the market.
The security and minimalrisk of the Treasury long bond, however, can lead to disadvantages. Yields tend to be relatively low in contrast tocorporate long bonds. Investors in corporate bonds thus have the potential to receive more income from the same principal investment. The higher yield compensates investors for taking on the risk that a corporate issuer will possibly default on its debt obligations. This pushes the long bond corporate yields out even further when factoring in the longevity risks.
Advantages include higher potential yields and income stability. However, Long-Term Bonds also come with risks, including interest rate risk, default risk, and reinvestment risk. These risks can lead to fluctuating bond prices and potential losses.
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.
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.
Short-term government bonds offer a range of benefits, including safety and stability, but investors should be aware of the potential risks, such as lower returns and inflation risk. Understanding the pros and cons can help you make informed investment decisions based on your financial goals and risk tolerance.
Corporate bonds aren't backed by the government, so they aren't as safe as Treasurys, but that means they'll typically offer higher yields. The interest rate available will depend on the financial strength of the company doing the borrowing.
Historically, bonds are less volatile than stocks.
Bond prices will fluctuate, but overall these investments are more stable, compared to other investments. “Bonds can bring stability, in part because their market prices have been more stable than stocks over long time periods,” says Alvarado.
Risk Considerations: The primary risks associated with corporate bonds are credit risk, interest rate risk, and market risk. In addition, some corporate bonds can be called for redemption by the issuer and have their principal repaid prior to the maturity date.
Bond funds allow you to buy or sell your fund shares each day. In addition, bond funds allow you to automatically reinvest income dividends and to make additional investments at any time. Most bond funds pay regular monthly income, although the amount may vary with market conditions.
There are two ways to make money on bonds: through interest payments and selling a bond for more than you paid. With most bonds, you'll get regular interest payments while you hold the bond. Most bonds have a fixed interest rate.
Bond funds typically streamline their payments to investors into a monthly schedule of distributions, the amount of which may fluctuate from month to month.
Pros: I bonds come with a high interest rate during inflationary periods, they're low-risk, and they help protect against inflation. Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest.
Bonds are an investment product where you agree to lend your money to a government or company at an agreed interest rate for a certain amount of time. In return, the government or company agrees to pay you interest for a certain amount of time in addition to the original face value of the bond.
Bonds tend to be less volatile and less risky than stocks, and when held to maturity can offer more stable and consistent returns. Interest rates on bonds often tend to be higher than savings rates at banks, on CDs, or in money market accounts.
There are two primary reasons why long-term bonds are subject to greater interest rate risk than short-term bonds: There is a greater probability that interest rates will rise (and thus negatively affect a bond's market price) within a longer time period than within a shorter period.
Inflation can also reduce the buying power of the dollars invested in a 30-year bond. To offset these risks, all investors usually demand higher yields for longer-term maturities—meaning 30-year bonds usually pay higher returns than shorter-term bonds from an issuer or in any category.
Generally, bonds with long maturities and low coupons have the longest durations. These bonds are more sensitive to a change in market interest rates and thus are more volatile in a changing rate environment.
These are the risks of holding bonds: Risk #1: When interest rates fall, bond prices rise. Risk #2: Having to reinvest proceeds at a lower rate than what the funds were previously earning. Risk #3: When inflation increases dramatically, bonds can have a negative rate of return.
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