There is a pervasive notion out there in the investing world that U.S. government debt (be they notes, bills or bonds) is one of, if not the safest instruments out there for investors. There is no such thing as a free lunch though, and investors need to take a broader view of risk when evaluating this topic. While U.S. government securities are indeed some of the safest investments available by certain measures, they are by no means a risk-free investment option.
The Faulty, but Convenient, Premise of "Risk-Free Return"
Part of what bulwarks the idea that government securities are risk-free is that financial models seem to say that they are. After all, concepts and models like modern portfolio theory, Black-Scholes, and the capital asset pricing model all require a "risk-free" rate of return in the calculations. While alternatives like German bond rates and Euribor rates have been used from time to time, U.S. government securities often fill the role as a proxy for that risk-free rate.
To read the full piece, click the link:
http://financialedge.investopedia.com/financial-edge/0811/Are-U.S.-Bonds-Really-Risk-Free.aspx
2 comments:
I think it was Jim Grant who referred to Treasuries in the current environment as "return-free risk."
Nice. Good quote! Especially for the short-dated stuff.
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