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How to Decide Between Long-Term and Short-Term Treasury Bonds

How to Decide Between Long-Term And Short-Term Treasury Bonds?

A treasury bond is a U.S. government bond or debt security issued by the federal government of the United States that provides investors with some of the safest fixed-income returns available. Most investors believe that U.S. debt instruments, such as short term treasury bonds, are risk-free since the government backs them up with the capacity to tax American citizens and residents.

However, the interest rate on these risk-free assets has a substantial impact on the worldwide interest rate market, and the Treasury also issues other securities, such as treasury bills and notes, which are classified as short-term treasury bonds. Read more about Best High Yield Bond Funds.

In this post, we will look at the differences between long-term treasury bonds and short-term treasury bonds, as well as how to choose between the two.

What Are Treasury Bonds?

A treasury bond is a type of fixed-income security issued by the United States government that can be purchased directly from the treasury by individuals and major institutions such as banks. The Treasury authorizes purchases in $100 increments from $100 to $5 million at a time, and these bonds are classified as long-term bonds with maturities of 20 or 30 years.

However, the United States government also provides short-term treasury bonds known as treasury bills or treasury notes with maturities ranging from a few weeks to a few years.

Many investors regard US government bonds as risk-free investments since the government backs up its commitment to pay with the strength of the American economy and the ability to tax Americans. As a result, the danger of default or inability to make interest payments is negligible, and investors regard US government bonds as one of the safest investments available.

And, because treasury bonds are an important risk-free asset for many investors, the going rate for the bonds is vital, and riskier investments, such as bonds from less secure countries or corporations, give a high return to justify the higher risk. So, Invest in US Treasury Bonds.

Difference Between Short-term and Long-Term Treasury Bonds

When you acquire a U.S. treasury bond, your investment helps fund government programs and initiatives while also providing a low-risk return on your investment; however, you must select whether to purchase long-term or short-term treasury bonds.

The length of time before you get paid back for your investment is usually the difference between long-term and short-term treasury bonds. Treasury bonds pay interest semiannually, and when the bond matures, the owner is compensated with the face value of the bond.

Short-term treasury bonds, on the other hand, mature in three years or less from the date of purchase, medium-term bonds mature in three to ten years, and long-term bonds mature in more than ten years.

Timing is not the only Difference Between Long Term and Short Term Treasury Bonds.

The fundamental distinction between long-term and short-term treasury bonds is their maturity dates, but the differing timelines translate into other distinctions between short-term and long-term bonds, since short-term and long-term bonds expose investors to different forms of risks.

Long-term treasury bonds have more price risk or interest rate sensitivity because the money invested in the bond is locked up for a longer period of time, and there is a greater likelihood that interest rates will move dramatically throughout the bond term. As a result, long-term government bonds can be extremely sensitive to changes in interest rates, with prices plummeting precipitously.

Treasury bonds entail less price risk since they are more susceptible to reinvestment risk; however, these bonds mature relatively rapidly, and at maturity, investors face the risk of reinvesting the maturing proceeds at the current market rates.

However, if interest rates are rising at the moment, reinvestment will be beneficial; if interest rates are falling, investors will have a less favorable environment for reinvestment.

Contrarily, investors who retain their bonds until maturity have locked in a known yield for a longer period of time, thereby deferring the risk of reinvestment. Long-term government bonds have a market price that fluctuates with interest rate changes.

Return on Investment from long-term and short-term Treasury Bonds

Another distinction between long-term and short-term government bonds is the return on investment; exceptionally, Treasury bonds that mature in one year or less are also known as treasury bills. These treasury bills do not pay interest throughout the life of the bond, and they are sold at a discount to their face value, with the owner able to cash in the bond for its full face value upon maturity.

Since you know the difference between the face value and the discounted rate you paid when you buy a treasury bill at a discount, you can calculate exactly how much you will make when the bill matures.

Other government bonds pay half their coupon rate in interest on a semiannual basis, and in some interest rate settings, these bonds will sell for more than their face value, while in others, they may sell for less.

Source : Short term treasury bonds

Choosing Between Long-Term and Short-Term Treasury Bonds

The best option for you is determined by your risk tolerance and time horizon, as well as the current interest rate environment. Treasury bonds outperform in a rising interest rate environment, while long-term treasury bonds outperform in a dropping interest rate environment.

However, for many investors, both long- and short-term treasury bonds can be a crucial component of creating a full investment portfolio because fixed income, in general, can help provide stability within a portfolio and some protection against equity drawdowns. It can also be a very effective diversifying asset within a portfolio.


U.S. Treasury bonds, whether held for a long or short period of time, are among the safest investments you can make since they are fully guaranteed by the U.S. government, and there is little chance of losing the principal value of your investment.


1.  What is the purpose of investing in short-term Treasury bonds?

Investing in short-term Treasury bonds can provide a relatively safe way to preserve capital and earn a modest return. They are often used by investors seeking to park excess cash or secure a predictable income over a short time horizon.

2.  Are short-term Treasury bonds risk-free?

While short-term Treasury bonds are considered very low risk compared to other investments, they are not entirely risk-free. They are subject to interest rate risk, which means their market value can fluctuate based on changes in prevailing interest rates.

3.  How are short-term Treasury bond interest rates determined?

The U.S. Department of the Treasury sets the interest rates on short-term Treasury bonds through regular auctions. The rates are influenced by various factors, including prevailing market interest rates, economic conditions, and the government’s borrowing needs.

4.  Can short-term Treasury bonds be sold before maturity?

Yes, short-term Treasury bonds can be sold before their maturity date in the secondary market. However, the market price may be different from the purchase price due to changes in interest rates and other market conditions.

5.  How are short-term Treasury bonds different from other types of Treasury securities?

Short-term Treasury bonds have shorter maturities compared to other Treasury securities such as Treasury notes and Treasury bills. Treasury notes typically have maturities of 2, 3, 5, 7, or 10 years, while Treasury bills have even shorter maturities of up to one year.