When evaluating investment choices, assessing the risk level is crucial to make informed decisions. The risk refers to the likelihood that the investment may lose value or fail to meet expected returns. Some major factors that determine investment risk include market volatility, political and economic stability, business fundamentals, and liquidity. By comparing these risk factors, Treasury bonds stand out as the least risky among major investment options.
Treasury bonds have implicit government backing and thus lowest credit risk
Treasury bonds are issued by the federal government to finance public spending. They carry virtually no risk of default given the government’s taxation powers and monetary control. Even in extreme cases like war or financial crisis, the government is highly capable and willing to pay its debt as a priority. The implicit guarantee eliminates credit/default risk, which is a key risk factor for corporate bonds and stocks. Therefore, Treasury bonds are safer than corporate securities in this regard.
Treasury bonds have minimum market risk with stable principal
While stocks and corporate bonds face unpredictable price swings in secondary trading, Treasury bonds promise full repayment of principal upon maturity. Their prices still fluctuate before maturity, but the fluctuations tend to be smaller than riskier assets. Also, investors can hold the bonds until maturity to eliminate interim price changes. In contrast, stocks/corporate bonds can permanently lose principal value due to business troubles or market crashes. Thus, Treasury bonds carry lower market risk.
Treasury bonds involve almost no liquidity risk
Liquidity risk occurs when an investment cannot be readily sold for cash without a price discount. Treasury bonds have very high trading volumes in active secondary markets, ensuring fast monetization at fair prices. On the other hand, assets like real estate and private equity investments tend to be much less liquid. Trying to sell them in a downturn can incur large losses. So Treasury bonds involve minimal liquidity constraints compared to other major assets.
In summary, Treasury bonds carry the lowest risk among major investment options because they have implicit government backing against default, stable principal value, and high liquidity. Other assets like stocks and corporate bonds face material credit risk, market risk, and liquidity risk.