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Given that Treasury bills are theoretically assumed to be risk-free investments (not going into whether they really are or not), is there any reason anyone who is planning on keeping the bonds until maturity doesn't just leverage these as much as possible? The way I understand it the lack of risk of the bonds becoming worthless as well as the fact that you'd always get your initial investment back upon maturation (as long as you're not buying them for more than their underlying value) means that buying these with leverage would in theory have no downsides.

Now, this to me sounds like a "too good to be true" scenario, so I was wondering which risks and other issues I'm missing here, at least aside from the fact that the option of a country defaulting does always still exist.

As an aside, this is not something I'm actually planning on doing right now, since the dissonance between 'risk-free' and 'leverage' sets off all sorts of alarm bells in my mind.

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  • Take a look at the AGNC income sheet. Interest expense exceeds interest income but hedging gains exceed loss on investments.
    – S Spring
    Commented Oct 26, 2023 at 21:51

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Leverage is typically obtained either by using derivatives, which include a premium or some other component to account for the time value of money, or by borrowing to buy more than you have capital for.

If you borrowed money to buy government bonds (which have the lowest yield available), then you're going to pay more in interest than you'd get from the bonds.

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    Ah, that makes sense. Completely forgot that interest payments were not only a thing, but also always higher than government bond yields.
    – kenod
    Commented Oct 26, 2023 at 19:01
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Also, if a bond returned more money than what it would cost to buy the bond on credit, there would be a massive chance for arbitrage.

Ostensibly, bonds are tradeable commodities, the demand for this basically free money would then certainly be higher than the supply. This would drive the price (of the bond) back up to a level where the credit for buying the bond would cost more than the bonds yield.

There are parallels in the housing market that mimics this concept. Typically you would not be able to cover a house mortgage completely with rent income, because if you could you could buy a house at no actual cost to you. This would lead to in theory infinite demand to a finite supply (houses). This would then lead to house prices then rising way over what the rent income may be and the problem going away.

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Leverage isn't free. Government bonds are effectively the government's way to borrow money for its spending. For it to be profitable to borrow money to buy government bonds, the interest you pay would need to be less than the interest you receive. Consider also that the interest rate you pay is based on the risk free rate + your own personal risk premium in the mind of your lender.

Therefore, for this plan to work, your bank would need to consider you less risky than the federal government.

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