Although Treasuries are considered free from credit risk, they are affected by other types of risk, principally interest-rate risk and inflation risk. While investors are effectively guaranteed to receive interest and principal as promised, the underlying value of the bond itself may change depending on the direction of interest rates.  | As with all fixed-income securities, if interest rates in general rise after a Treasury security is issued, the value of the issued security will fall, since bonds paying higher rates will come into the market. Similarly, if interest rates fall, the value of the older, higher-paying bond will rise in comparison with new issues.
In a period of low inflation and moderate shifts in interest rates, investors often are content to hold their bonds to maturity, ignoring the changes in market value of their bonds. However, some investors strive to structure their bond holdings to minimize market risks and take advantage of market opportunities. |
One such technique is called "laddering," in which the portfolio is structured so that securities mature at regular intervals, allowing the investor to make new choices with available cash.
To help investors deal with inflation risk, the Treasury has created inflation-indexed notes and bonds called TIPS, and inflation-indexed savings bonds called I Bonds. TIPS are available through brokers, such as Bonds.com. I Bonds are available through banks, credit unions, savings institutions or Treasury Direct.
Finally, Treasury securities, like all things that are bought and sold, are affected by the laws of supply and demand. In the late '90s, the Treasury Department began retiring the government's debt. It did this by curtailing the sale of certain securities, especially 30-year bonds, and by buying back long-dated bonds held by the public before their due dates. Together, these actions resulted in a perceived "shortage" of long-maturity Treasury securities. Prices for outstanding "long-bond" rose and yields fell. In fact, at mid-2000 an "inverted yield curve" was evident in which yields on the 30-year bonds were markedly lower than those on notes, a reversal of the usual trend. By mid 2003, as the yield curve had become steeply and positively sloped and as the fiscal situation had reversed from surplus to deficit, Treasury had ceased to buy back existing bonds. In February 2006, the Treasury brought back the 30-Year auction indefinitely and will reopen the bond in August.
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