What Are The Investment Risks With Long-term Treasury Bond Exchange Traded Funds?

Considering the iShares Lehman 10-20 Year Treasury Bond Fund (TLH)

muncie birder answered:
John hit the nail on the head, but perhaps you would like more specifics. TLH currently pays 4.2% interest. There are mainly two risks that are associated with this particular fund.

1. the risk that long term interest rates might rise.
2. that inflation is going to increase. Note that the current interest rate is already below the inflation rate, about 2-4% before taxes and more after taxes. There are other risks including as John mentioned credit risk. Should U S debt really be rated AAA. In my opinion about B- would be a more accurate rating. There is also the risk that taxes might rise. Considering the budget deficit of the country, it seems very likely. Another risk is that the current financial crisis might abate. That would make U S paper less attractive to investors.

Col. Kurtz answered:
The main risk I see here is in the duration of the bonds - namely, 10-20 year bonds. Those kinds of durations can be very volatile on the downside. With the US Government on the hook for bailing out all the economic mess, and the resultant printing of ever more money to the tune of billions of dollars to pay for it, you could see longer-term bond prices (and prices of bond funds such as LTH) get seriously smacked down.

Of course it's always hard to time markets, but, I wouldn't touch this fund or any other bond fund right now until we see how the US Government plans to pay for all these bailout programs, and what it will do to US Treasury prices. So I don't think this fund is a safe investment right now, not even for long-term buy and hold investors. MAYBE revisit this fund if and when there's been a serious drop in price, then it may be worth buying and holding. But not now.