If an investor holds Treasury bonds maturing in 20 years, what risk are they primarily exposed to?

When an investor holds Treasury bonds maturing in 20 years, they are primarily exposed to inflationary risk. Treasury bonds are considered low risk in terms of credit risk, as they are backed by the U.S. government, which has historically not defaulted on its obligations. However, over a long maturity period such as 20 years, inflation can significantly erode the purchasing power of the fixed interest payments and the principal amount received at maturity.

Inflationary risk refers to the possibility that the rate of inflation will exceed the nominal return on the investment, leading to a decrease in real returns. For example, if the bonds yield a 3% interest rate and inflation rises to 4%, the investor effectively experiences a negative return in real terms. This significant period until maturity makes inflation an essential consideration for long-term bondholders.

While political risk could theoretically affect any investment, it is less relevant for Treasury bonds due to their unique standing. Capital risk relates to the potential decline in the value of the bond, often influenced by interest rate changes, but in this context, it is the risk of inflation that poses a significant threat over the lengthy timeframe of 20 years. Thus, inflationary risk stands out as the primary concern for an investor holding such