30-Year Treasury Bonds

Treasury bonds are widely considered to be the safest investments on the market. They carry absolutely no risk of default because the treasury can print money to repay the debts if necessary. Treasury bonds are issued in a variety of time frames, or maturities, with the 30-year option being the longest. In general, longer bonds carry a slightly higher risk due to numerous factors, and they carry slightly higher interest rates to compensate for the risk.

Risks of 30-year Bonds

The main risk associated with a 30-year bond is a lack of knowledge about the future markets and what may change during the time period you hold the debt. With a 5-year bond, you may have a reasonable guess at how the market will change. You will be able to compare the T-bond to those being issued by corporations in the same time frame to estimate its relative value. With a longer bond, this estimation becomes harder. Particularly, inflation becomes a much greater risk. When inflation is high, the value you earn as interest on the loan represents a lower profit. Basically, if your interest rate is five percent but inflation creeps up to three percent, then you are actually earning only two percent on the bond. You could earn the same amount with a reasonably profitable CD, making the option less attractive.

Inflation Protected Bonds

One way the treasury overcomes the threat of inflation is by using inflation-protected bonds. Basically, there are two models for this. The first model uses a standard interest rate and then adds the rate of inflation over each term. This means you will always be paid back for inflation in addition to the interest rate. A second model calculates the entire interest rate over the life of the bond and adjusts for this at the end of the bond's maturity when the bond is cashed in. Both formulas use essentially the same means of protection to assure your bond will not lose its value if inflation is high during the 30 years you hold the bond.

Benefits of 30-year Bonds

The treasury understands it is a challenge for you to lock down capital for as much as 30 years, and it offers unique opportunities on these longer bonds as a result. First, all treasury bonds offer tax benefits. Some bonds will be tax exempt during the time they are paying yields. Others will be tax exempt only when they are cashed in. In both models, though, the tax exemption applies to both federal and state taxes. This makes the bonds a good option for a college savings account or retirement savings account. In addition to these standard tax benefits, 30-year bonds will have higher yields than shorter bond options. The interest rates of the bonds are set each term, and you can get a quote for interest rates on T-bonds on the treasury's website. You will always find the longer bonds have a higher payout. If you can afford to lock down your capital, it makes sense to invest in the longer bond and make more money.