Should I put my nest egg in a 30-year Treasury bond?

By Dan Moisand

Risk comes in many forms, even with 'safe' investments

There are two common ways that bonds lose value.

Dear Dan,

With interest rates higher, I'm considering putting my nest egg in a 30-year Treasury bond BX:TMUBMUSD30Y. They're paying about 5.25%, which looks pretty good to me. I'm conservative with my money, and Treasurys are safe, right?

-Bond Friendly

Dear Bond Friendly,

If, by "safe," you mean there is little risk you won't get paid in full and on time, then yes - Treasury bonds are considered safe by most people. But that does not mean their prices can't fall.

There are two common ways bonds lose value. The first involves credit risk. If a bond issuer defaults - meaning it fails to make an interest or maturity payment - or the market fears a default is likely, the bond's price can drop. When the market value of a bond drops, its effective yield rises. Today, you can easily find stories arguing that the national debt is weakening the country's finances and helping drive the recent rise in interest rates.

That brings us to the second common way bonds lose value. The rise in interest rates not related to default concerns; inflation is the reason most often cited for rising rates right now. When rates rise, bond values drop.

Suppose that, on Sept. 30, you could have paid $1 million for a 30-year Treasury bond with a 5.6% coupon, a maturity value of $1 million and a maturity date of Sept. 30, 2056. On March 31, 2027, and every six months after that, you would receive $28,000 in interest, which is half of 5.6% of $1 million. On Sept. 30, 2056, you would receive the final $28,000 interest payment plus the $1 million maturity value.

At the moment you bought the bond, you knew your return would be 5.6% over the 30 years, barring a default. This is called yield to maturity (YTM).

On any day between the purchase and the maturity date, the amount you could sell the bond for will vary.

Let's say that on Oct. 1, market forces drive rates up to 6.6% on comparable 30-year bonds. The market value of your bond would drop to somewhere around $850,000. It drops because a buyer could purchase a new bond for $1 million and receive 6.6%, or $33,000 in interest payments every six months for the next 30 years, plus the maturity value. By paying only $850,000 for your bond, the buyer would receive the 5.6% interest payments your bond pays plus $150,000 in appreciation when the bond matures at $1 million. Together, that return equals the 6.6% the market requires.

If you are truly committed to holding the 30-year bond for 30 years, the drop in value is only a paper loss, and you will still receive the expected YTM of 5.6%. However, you do not know whether the value will drop further nor exactly when it may rise between now and then.

Longer-term bonds drop further than shorter-term bonds when rates rise. For example, a $1 million 1-year Treasury bill BX:TMUBMUSD01Y purchase hit with a quick 1% rise in rates would drop only about $10,000 in value.

There are other risks to consider, but two jump to mind.

If your entire nest egg is in 30-year bonds and you need cash during those 30 years, you may need to sell some. If that need arises after rates have risen, you would turn a paper loss into an actual loss.

There is also a risk that tax rates could increase. Interest on Treasurys is taxable when paid or when withdrawn from a retirement account or IRA. And those interest payments will not increase over the 30 years. Inflation should reduce what those $28,000 payments can buy.

Risk comes in many forms, even with so-called safe investments. Unless you are spending only a small fraction of your nest egg each year, over a 30-year time frame you are likely better off with a mix of investments that includes shorter-term bonds and a globally diversified array of stocks.

If you have a question for Dan, please email him with "MarketWatch Q&A" on the subject line.

-Dan Moisand

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10-06-26 1011ET