Treasury bonds can lose value, and it happens more often than most buyers expect. If you sell before maturity after interest rates have risen, the market price of your bond will be lower than what you paid. If you hold to maturity, inflation can quietly eat the purchasing power of your interest and your principal. Rare credit scares tied to debt-ceiling standoffs or rating downgrades can push prices down too. The one thing the U.S. government does guarantee is that you’ll get your full face value back at maturity, so a loss almost always requires either selling early or losing ground to inflation.
Rising Rates Push Down the Price of Bonds You Already Own
Bond prices and interest rates move in opposite directions. When the Federal Reserve pushes rates higher, newly issued Treasuries come with better interest payments, and your older bond, locked in at a lower rate, becomes less appealing on the secondary market. The only way a buyer will take your 3% bond when new ones pay 5% is if your bond’s price drops enough to close the gap.
The arithmetic is simple. A bond paying $30 a year on a $1,000 face value yields 3%. If prevailing rates jump to 5%, a buyer needs about $50 a year in effective yield from that same bond. The coupon is fixed at $30, so the price has to fall until the yield to maturity lines up with what the market now demands. That recalculation happens every trading day as rate expectations shift.
None of this affects you if you plan to hold the bond to maturity and collect the face value. It matters enormously if your plans change, or if you’re holding the bond inside a fund that marks to market daily.
Why Long-Term Treasuries Take the Biggest Hit
Not all Treasuries react equally. The longer a bond’s remaining life, the more its price swings when rates move. Analysts capture this sensitivity with “duration,” which roughly tells you the percentage price change to expect from a 1% shift in rates.
A 2-year note barely flinches, because principal is returning soon anyway. A 10-year note might drop around 7% in price for every 1% rate increase. A 30-year bond can fall roughly 14% from the same 1% move. If rates jump 2 percentage points, a 30-year bond could lose close to a quarter of its market value. Anyone holding long-term Treasuries through the 2022–2023 rate-hiking cycle watched exactly that play out.
The reverse is also true. When rates fall, long bonds gain more than short ones. If your timeline could change, sticking to shorter maturities limits your exposure to rate-driven losses.
Selling Before Maturity Locks in the Loss
The federal government guarantees you’ll receive the full face value of a Treasury bond at maturity.1TreasuryDirect. Understanding Pricing and Interest Rates That guarantee disappears the moment you decide to sell early. On the secondary market, the price is whatever another investor will pay, based on current rates, remaining maturity, and demand.
A bond with a $1,000 face value might sell for $920 or $960 depending on conditions. Brokerage commissions are modest today, often under $25 per trade or zero at some online platforms, but they still chip away at proceeds on top of any price discount. The combination of a below-par price and transaction costs means early sellers frequently walk away with less than they put in.
The 45-Day Hold on New Auction Purchases
If you buy a Treasury note or bond through TreasuryDirect at auction, you must hold it for at least 45 calendar days before transferring or selling it on the secondary market.2TreasuryDirect. Buying a Treasury Marketable Security That restriction doesn’t apply when the purchase was funded by reinvesting a maturing security. After the 45-day window, you can sell through a broker whenever you choose at whatever price the market gives you.
Savings Bonds Have Their Own Penalty
Series EE and Series I savings bonds work differently. You can’t sell them on the secondary market at all. You redeem them directly with the Treasury, and the earliest you can do that is 12 months after the issue date.3TreasuryDirect. I Bonds Redeem within the first five years and you forfeit the last three months of earned interest.4eCFR. 31 CFR 359.7 – Series I Savings Bonds Interest Penalty A bond cashed after 18 months pays only 15 months of interest. The redemption value will never drop below what you originally paid, but that three-month haircut is a real cost.
Inflation Can Erase Your Return Even If You Hold to Maturity
Even if you hold a Treasury to maturity and collect every interest payment, inflation can quietly destroy the value of what you receive. A standard Treasury note pays a fixed dollar amount that never adjusts. If inflation runs at 5% while your bond pays 3%, you’re losing about 2% of purchasing power each year. Economists call this a negative real return.
The math is straightforward: your real yield roughly equals the nominal yield minus the inflation rate. A 10-year note yielding around 4.15% sounds solid until you subtract 3% or 4% inflation, leaving a slim real gain or nothing at all.5Federal Reserve Bank of St. Louis. Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity Over a 20-year holding period, sustained inflation above your coupon rate can cut the purchasing power of the $1,000 principal repayment roughly in half.
This kind of loss is invisible on account statements because the dollar figures never change. You see it only when you try to buy groceries, fill a gas tank, or pay rent with dollars that stretch less than they used to. Fixed bond coupons are locked in from day one, and that rigidity is the trade-off you accept for the government’s guarantee.
Inflation-Linked Options That Reduce This Risk
The Treasury offers two instruments designed for this specific problem. Both adjust their returns based on the Consumer Price Index.
Treasury Inflation-Protected Securities (TIPS) are marketable bonds whose principal rises with inflation and falls with deflation. Because interest is paid as a percentage of the adjusted principal, coupon payments grow when prices rise. At maturity you receive the inflation-adjusted principal or the original face value, whichever is greater, so deflation cannot push your payout below what you started with.6TreasuryDirect. TIPS Treasury Inflation-Protected Securities TIPS still carry interest rate risk if you sell early, but the inflation piece of the return is effectively protected.
Series I savings bonds combine a fixed rate set at purchase with a variable inflation rate that resets every six months. For bonds issued from November 2025 through April 2026, the composite rate is 4.03%, built from a 0.90% fixed rate and a 1.56% semiannual inflation component.7TreasuryDirect. I Bonds Interest Rates I bonds cannot be traded on the secondary market, which eliminates market-price risk entirely. The cost is the 12-month lockup, the five-year early-redemption penalty, and an annual purchase cap.
Credit Risk, Downgrades, and Debt-Ceiling Standoffs
Federal law pledges the faith of the United States to pay principal and interest on all government debt obligations.8Office of the Law Revision Counsel. 31 U.S.C. 3123 – Payment of Obligations and Interest on the Public Debt The Fourteenth Amendment reinforces this by declaring that the validity of the public debt “shall not be questioned.”9Congress.gov. Fourteenth Amendment Section 4 Even so, markets still price in the possibility that political dysfunction could delay a payment.
All three major rating agencies have now moved the United States below their top rating. Standard & Poor’s cut the U.S. from AAA to AA+ in August 2011, Fitch followed with its own downgrade to AA+ in August 2023,10The U.S. House Committee on the Budget. U.S. Debt Credit Rating Downgraded, Only Second Time in Nations History and in May 2025 Moody’s lowered its rating from Aaa to Aa1, citing rising debt levels and persistent fiscal deficits.11Moody’s Ratings. Rating Action – Moodys Ratings Each downgrade signals slightly higher perceived risk, which can nudge borrowing costs upward and push existing bond prices down.
Debt ceiling standoffs create a sharper version of this problem. Federal Reserve research found that during the 2011 and 2013 impasses, Treasury yields across all maturities ran 4 to 8 basis points higher than normal as the projected breach dates approached.12Federal Reserve Board. Take It to the Limit: The Debt Ceiling and Treasury Yields Bills maturing right around the expected default window got hit hardest, with excess yields spiking as high as 46 basis points in 2013. Those premiums vanished almost immediately once Congress reached a deal, but investors who sold during the panic locked in real losses.
A true default, where the government actually misses a scheduled payment, has never happened. The more practical risk for most investors is the volatility surrounding these political episodes, which can force losses on anyone who needs to sell at the wrong moment.
The Tax Side of a Loss
Interest on Treasury securities is subject to federal income tax but exempt from state and local income taxes.13Office of the Law Revision Counsel. 31 U.S.C. 3124 – Exemption From Taxation That’s a separate issue from losing value, but the tax code does soften the blow if you do sell at a loss. When you sell a marketable Treasury on the secondary market before maturity, the difference between your purchase price and the sale price is treated as a capital gain or loss for federal tax purposes. Bonds held longer than one year qualify for long-term treatment; bonds held a year or less generate short-term gains or losses. A capital loss can offset gains elsewhere in your portfolio, so a bad sale may at least trim your tax bill.