What Are the Advantages & Disadvantages of U.S. Treasury Bonds?

Treasury bonds draw investors because they're safe, even when the economy turns sour. Your return on the bond is guaranteed by the full credit of the United States. Unlike some nations, the risk of revolution overthrowing the U.S. government is low. The American economy is strong because it's diverse: It doesn't depend on a single resource such as oil. Another reason bonds are a safe investment is that the Treasury can't call most bonds, so investors aren't forced to redeem them before maturity.

The market for Treasuries is not only large, it's incredibly liquid. Buyers and dealers can resell their purchases at any time. It's all the easier because the bonds are electronic, so there are no paper certificates to transfer. The government provides enough information about bond issues that both buyers and sellers can calculate the value of a bond at any time. It's easier to trade with confidence when everyone knows what the items in play are worth.

Treasuries are a safe investment, but they won't provide thrilling returns. The rate of return varies between bond issues, but even if you hold a bond to maturity, the returns are low. Investments that offer greater risk than Treasury bonds also offer greater returns. If you're comfortable with a high level of risk or you insist on a higher return on your investments, Treasury bonds may not be right for you. Another consideration is time: Redeeming bonds takes at least 10 years.

Treasuries are a very low-risk investment, but they're not risk-free. The U.S. government has to take on new debt so that it can afford to pay off old debts, such as maturing bonds. It's possible, at least in theory, that Congress could refuse to approve any new debt, triggering a default. Another risk, given the length of time you hold Treasury bonds, is inflation: If it's high enough, you may not keep up with inflation, i.e., you could end up cashing in a bond that has less purchasing power than the money you originally spent.