US bonds face new risks

[WORLD] For decades, U.S. Treasury bonds have been held up as the world’s gold standard for safety—a “risk-free” asset underpinning global finance. Yet, recent market volatility, surging national debt, and political brinkmanship have exposed cracks in that reputation. As yields rise and uncertainty grows, investors and everyday Americans alike are asking: Are U.S. bonds truly risk-free?

The “Risk-Free” Reputation—And Its Limits

U.S. Treasury bonds, often called T-bonds, are backed by the full faith and credit of the U.S. government. Historically, the United States has never defaulted on its debt, and Treasuries are among the most liquid assets globally, making them a cornerstone of conservative investment portfolios. This reputation has led many to consider them “risk-free”—but that label comes with important caveats.

“No debt obligation, whether U.S. government or corporate, is free of all risk. However, U.S. Treasuries of all maturities have long been considered safe from the risk of payment default.”

While the risk of outright default remains extremely low, several other risks can impact investors’ returns and the broader economy.

Key Risks Facing U.S. Bonds

Interest Rate Risk

How it works: When interest rates rise, the prices of existing bonds fall. This inverse relationship means that investors who need to sell their bonds before maturity could face losses.

Recent example: Between March 2020 and October 2023, the Morningstar US 10+ Year Treasury Bond Index plummeted nearly 48% as yields surged from historic lows to nearly 5%.

This kind of dramatic price movement has upended traditional views of bonds as low-volatility holdings. The so-called bond "safe haven" saw its worst performance in decades, leading even institutional investors such as pension funds and insurance companies to reassess their allocations. With longer-duration bonds particularly sensitive to rate changes, the typical 60/40 portfolio strategy—60% stocks and 40% bonds—has come under scrutiny for its vulnerability in a rising-rate environment.

Inflation Risk

Explanation: If inflation outpaces the fixed interest payments from bonds, the real (inflation-adjusted) return for investors turns negative.

Current context: With inflation running at 2.6% as of March 2025 and 10-year Treasury yields at just over 4%, the real returns are modest—and could become negative if inflation accelerates further.

Economists caution that inflation is notoriously difficult to predict and control. While recent Federal Reserve policy has helped bring inflation down from its post-pandemic highs, factors such as supply chain disruptions, energy market shocks, or fiscal stimulus programs could reignite upward pressure on prices. For retirees and conservative savers who rely on fixed income from bonds, even modest inflation can have a compounding effect on purchasing power over time.

Price and Market Risk

Volatility: Bond prices can fluctuate due to economic news, geopolitical events, or shifts in investor sentiment. A mass sell-off, as seen during tariff disputes or debt ceiling debates, can drive yields higher and prices lower.

Liquidity: While Treasuries are highly liquid, rapid changes in demand can still lead to price swings, affecting investors who need to exit positions quickly.

Credit and Political Risk

Debt Ceiling Drama: Political standoffs over the U.S. debt ceiling have repeatedly threatened to push the government to the brink of technical default, rattling markets and prompting credit rating agencies to downgrade U.S. debt.

Rising National Debt: The U.S. national debt now exceeds $36 trillion, raising questions about long-term fiscal sustainability and the government’s ability to manage future obligations.

Credit Ratings: While still highly rated, U.S. Treasuries have seen their outlook downgraded by agencies like Fitch and Moody’s due to persistent political and fiscal challenges.

The most recent debt ceiling standoff in mid-2024 triggered a temporary suspension of Treasury bill auctions, causing ripple effects in money markets. Short-term funding rates spiked and institutional investors scrambled to find alternate places to park cash. Though a last-minute agreement averted default, the episode underscored how political dysfunction—not economic fundamentals—can generate meaningful disruptions in a market that is assumed to be the bedrock of global finance.

Global and Geopolitical Risks

Foreign Holders: Major foreign creditors, such as China, hold significant amounts of U.S. debt. Geopolitical tensions or strategic decisions by these holders to reduce their Treasury holdings could disrupt the market and push yields higher.

Safe Haven Status Challenged: Political instability, unconventional debt management proposals, or doubts about the rule of law can erode confidence in Treasuries as the ultimate safe haven.

There are also growing discussions among international policy circles about "de-dollarization"—the move by some nations to reduce dependence on the U.S. dollar and diversify their reserves into other currencies or assets. While the dollar and Treasuries remain dominant, incremental shifts by major players like Brazil, Russia, and even some Middle Eastern sovereign funds signal a potential long-term erosion of America’s financial hegemony. Any decline in global demand for Treasuries could necessitate higher yields to attract buyers, raising borrowing costs for the U.S. government.

Why These Risks Matter for Everyday Americans

Borrowing Costs: Rising Treasury yields translate into higher interest rates for mortgages, car loans, and credit cards, directly impacting household budgets.

Bank Stability: Many banks hold Treasuries as safe assets. Falling bond prices can erode their capital, potentially threatening the stability of the financial system if losses mount.

Retirement Portfolios: Investors relying on bonds for stable income may see the value of their holdings drop, particularly if they need to sell before maturity or if inflation erodes purchasing power.

Even beyond financial markets, rising Treasury yields have far-reaching implications for public policy. Higher interest costs on government debt limit fiscal flexibility, potentially crowding out spending on social programs, infrastructure, or defense. According to the Congressional Budget Office, interest payments on the debt are projected to surpass military spending by 2027—a sobering indicator of how the cost of borrowing could shape national priorities in the years ahead.

Expert Perspectives

Monica Defend, head of Amundi Investment Institute, highlights that “the more significant concern is the potential for a technical default stemming from political disputes surrounding the debt ceiling”. Meanwhile, economist Anastassia Fedyk notes that while investors do not expect an imminent default, “there is considerable uncertainty regarding the U.S. economy’s trajectory”.

The Bottom Line: Low Risk, Not No Risk

U.S. Treasury bonds remain among the safest investments globally, especially in terms of payment default. Their liquidity, government backing, and historical reliability make them a bedrock of financial markets. However, the notion that they are truly “risk-free” is a myth.

Investors must consider:

• Interest rate and inflation risks that can erode returns
• Market and political volatility that can impact prices and yields
• Long-term fiscal and geopolitical uncertainties that could challenge the U.S. government’s borrowing costs and credit standing

As recent events have shown, even the world’s safest assets are not immune to risk. For investors and policymakers alike, understanding these vulnerabilities is crucial in a world where the only certainty is uncertainty.