Long Bond

What Is a Long Bond?

Long bonds allude to the longest maturity bond offering from the U.S. Treasury. It can likewise carry over to the traditional bond markets to include the longest-term bond accessible from an issuer. The longest maturity offering from the U.S. Treasury is the 30-year bond which follows the 10-year bond. In 2020, the U.S. Treasury started issuing a 20-year bond.

The U.S. Treasury's 30-year long bond pays interest semi-annually. Like all U.S. Treasury bonds, it is backed by the full faith and credit of the U.S Treasury, which leads to an extremely low default risk.

Long Bonds Explained

Long bonds offer a maturity date far out on the investment horizon. For the U.S. Treasury market, this includes the 30-year Treasury which has the longest maturity, everything being equal. Corporate bonds, be that as it may, can issue maturities in various varieties. Corporate bonds might offer maturities of 15, 20, or 25 years. Generally, the longest accessible maturity offering from an issuer might be alluded to as the long bond.

The Treasury's long bond is viewed as quite possibly of the most secure security and is among the most actively traded bonds in the world. The yield on the U.S. Treasury is basically the price the government pays to borrow money from its investors. For instance, a $30,000 Treasury bond with a 2.75% yield gives a $825 annual return on investment. Whenever held to maturity, the government will likewise return all $30,000 to the bondholder.

Historical yields on the 30-year U.S. Treasury have included the following:

Long-Term Yields

In a solid economy, yield bends on bonds are commonly normal with longer-term maturities paying higher yields than more limited term maturities. Long bonds offer one advantage of a locked-in interest rate over the long run. Be that as it may, they likewise accompany longevity risk. At the point when an investor holds a long-term bond, that investor turns out to be more powerless to interest rate risk since interest rates might actually increase over a long-term period.

Fundamentally, when interest rates go up, bond prices go down. This is on the grounds that new bonds can offer higher yields than existing bonds. Discounting existing bond cash flows at the higher yield brings about a lower price.

Assuming rates do increase, the investor makes less on the bond they own and that bond's price additionally falls in the secondary market, making it worth less for trading. Given long bonds' opportunity to maturity, their price frequently drops more substantially than do bonds with more limited maturities since there are more discounted payments involved. An investor who buys longer-term bonds is thusly typically compensated with generally a higher yield in light of the longevity risk they are willing to take on.

The bond market can generally be broken into five categories:

Treasuries
Municipals
Investment-grade bonds
Intermediate-grade bonds
High-yield junk bond

Every category of bonds accompanies its own qualities and risks. High yield junk bonds are the riskiest of all bonds and subsequently offer the highest yields. Besides, long bonds in this category offer investors a higher yield on the long end in view of the additional compensation for holding them to a longer maturity date.

As a rule, it's difficult to foresee how financial markets and the economy will perform north of a 30-year period. Interest rates, for instance, can change essentially in just a couple of years, so what resembles a decent yield for a bond at the hour of purchase probably won't appear to be as beneficial 10 or 15 years down the road. Inflation can likewise reduce the buying power of the dollars invested in a 30-year bond. To offset these risks, all investors as a rule demand higher yields for longer-term maturities — meaning 30-year bonds typically pay higher returns than more limited term bonds from an issuer or in any category.

Advantages and disadvantages of Treasury Bonds

The backing of the U.S. Treasury makes Treasury bonds the most reliable bond investment across the bond market. Another principal advantage of Treasuries and the long Treasury bond specifically is liquidity. The secondary market for Treasuries is large and incredibly active, making them simple to buy and sell on some random trading day. The public can purchase long bonds straightforwardly from the government without going through a bond broker.

Long bonds are likewise accessible in numerous mutual funds. As a general rule, investors will make some more straightforward memories buying and selling the U.S. Treasury long bond consistently versus different types of long bonds in the market.

The security and minimal risk of the Treasury long bond, nonetheless, can lead to disadvantages. Yields will more often than not be somewhat low as opposed to corporate long bonds. Investors in corporate bonds consequently can possibly receive additional income from a similar principal investment. The higher yield repays investors for taking on the risk that a corporate issuer will conceivably default on its debt obligations. This drives the long bond corporate yields out even further while factoring in the longevity risks.

Highlights

It can likewise carry over to the traditional bond markets to include the longest-term bond accessible from an issuer.
Investing in the long bond Treasury and other corporate long bonds accompanies an emphasis on investing for long-term yield which has its own risks as well as higher rewards.
Long bond is in many cases a term used to allude to the longest maturity bond offering from the U.S. Treasury, the 30-year Treasury bond.