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I am curious about the liquidity of U.S. treasury bonds. I always hear about how liquid they are.

I like the rates of the 30 year treasury bonds but lets say I don't want to park money for 30 years. Can I buy the bond, collect interest for one year, and then exit the bond at no loss?

This is assuming that the bid and ask spread is so tight that there is little-to-no slippage and that I do not expect the bond strength to weaken greater than the interest earned that year.

Insight appreciated.

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A couple of points.

  • You may be able to re-sell the bond after the first year, but you won't be guaranteed all your money back: it will still be worth the same in 30 years, but it may not be worth the same tomorrow. If interest rates rise, the price of a new 30-year bond will fall. Since your 29-years-left bond is almost equivalent, you should expect that its face value will also fall. The 30-year bond is the most vulnerable to interest rate risk, since it is so long-term: a little difference in rate will change things a lot after thirty years. Note also that interest rates are at or near historic lows; they have very little room to fall and a lot of room to rise.
  • Your brokerage, bank, or credit union can help you re-sell your Treasury bonds. You may wish to investigate the process and any fees involved. They will probably be willing to tell you all about it. I cannot meaningfully comment on the spreads involved. The Treasury itself may also provide some tools; visit http://treasurydirect.gov and learn more.
  • You may also wish to consider consider a bond mutual fund or ETF. They can be bought or sold like stocks, which may be a more comfortable and convenient process for some people. Note that the interest rate risk in these funds is different than for a bond, because they are continually reinvesting; the risk does not fall as the bond gets closer to maturity. Read the prospectus.
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No citation, but I once read the average holding period of a 30 yr treasury is 8 hours. A rise in the rate by just .1% will drop the value by just under 2% wiping out nearly a full year's gains. With 29 years to go the value of the 3% bond will be worth $981 if the rate were then 3.1% It's at 3.16% the bond would drop to exactly $970 after the year, i.e. you've gotten no return at all. I view this as pretty high risk.

  • what about short selling treasury bonds then. – CQM Nov 8 '11 at 16:06
  • When you are short a dividend paying stock or bond, you have to pay the owner the dividend. It's an expensive proposition. The Fed may keep rates this low for a while. "There's no free lunch" – JoeTaxpayer Nov 8 '11 at 17:17
  • I understand, what about bonds you have no faith in, like european ones FOR INSTANCE – CQM Nov 8 '11 at 17:28
  • In theory, you know no better than anyone else, (I don't either, by the way) so the price reflects the current fair value taking all known information into account.n – JoeTaxpayer Nov 8 '11 at 17:40
  • You can short any security, but you have to find someone willing to let you borrow the security to sell. At times this means having to pay an interest rate to the person you are borrowing the security from. – Pablitorun Nov 14 '11 at 17:30

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