What Are Government Bonds and Why I Don’t Own Them

For decades, the standard financial advice has included some version of this: hold stocks for growth, hold bonds for safety. As you get older, shift more into bonds. Use target-date funds to do it automatically.

I think this advice is increasingly wrong – not because bonds have never worked, but because the world they were designed for no longer exists.

Here is what a government bond actually is, how it works, why it was considered safe, and why I believe holding significant amounts of government bonds today is one of the most misunderstood risks in personal finance.

What a Government Bond Actually Is

A government bond is a loan. When you buy a US Treasury bond, you are lending money to the federal government. In return, the government promises to pay you a fixed interest rate – called the coupon – for a set period, and then return your original investment – called the principal – when the bond matures.

A 10-year Treasury bond at 4 percent means you lend the government $10,000 today. Every year for 10 years, you receive $400 in interest. At the end of year 10, you get your $10,000 back.

On paper, this sounds safe. The US government has never defaulted on its debt. The interest payments are predictable. The principal comes back at the end. Compared to stocks, which go up and down constantly, bonds feel stable.

That stability is real – but it is measured in dollars. And that is exactly the problem.

The Inflation Math That Changes Everything

Here is the core problem with bonds in plain numbers.

Say you buy a 10-year Treasury bond yielding 4 percent. You are locking in a 4 percent annual return for a decade. Over those 10 years, if inflation averages 3 percent per year, your real return is approximately 1 percent. Not great, but at least you are ahead.

But what if inflation averages 5 percent? Your real return is negative 1 percent per year. You are losing purchasing power every single year while congratulating yourself on owning a “safe” asset. The dollar amount in your account grows. What it can buy shrinks. That gap is the loss, even if you never see it labeled as such on your statement.

This is not a hypothetical. In 2021 and 2022, the US experienced the highest inflation in 40 years. CPI peaked above 9 percent. People holding 10-year Treasuries at 1.5 percent yields were losing over 7 percent of their purchasing power annually. Their “safe” bonds were one of the worst-performing assets in real terms during that period.

And it gets worse. When inflation rises, interest rates rise with it. When interest rates rise, existing bond prices fall – because a new bond paying 4 percent is worth more than your old bond paying 1.5 percent. In 2022, the US bond market experienced its worst single-year performance in modern history. Long-term Treasury bonds lost 25 to 30 percent of their value. The asset class everyone held for safety was down more than many stock portfolios.

Why the Government Needs Inflation – and What That Means for Bonds

This is the part that most financial advisors will not say out loud.

The United States government is carrying over $36 trillion in debt. That number grows every year because the government consistently spends more than it collects in taxes. The interest payments alone on that debt now exceed $1 trillion per year – more than the entire defense budget.

There are three ways to deal with a debt problem that large: grow your way out of it, default on it, or inflate it away. Defaulting is politically and economically catastrophic. Growing fast enough to outpace the debt accumulation has become increasingly difficult. That leaves inflation.

When the government inflates – expands the money supply – the real value of its existing debt decreases. A trillion dollars of debt borrowed in 2010 dollars is worth significantly less in 2030 dollars after a decade of inflation. The government repays the debt in cheaper future dollars. The burden lightens without ever officially being reduced.

Now think about what this means for bond investors. You lend the government $10,000 today. The government has a structural incentive to inflate the currency between now and when they pay you back. They repay you $10,000 in future dollars that buy less than today’s $10,000 did. You got all your money back nominally. You lost purchasing power in real terms.

You are not just accepting inflation risk when you buy government bonds. You are lending to the entity that controls the printing press and has a direct financial incentive to use it. The conflict of interest is built into the structure.

When Bonds Made Sense – and Why That Era Is Over

I want to be fair. Bonds were not always the problematic asset I am describing. There was a specific era when they made a lot of sense.

From roughly 1982 to 2020, interest rates fell almost continuously. When rates fall, existing bond prices rise. Someone who bought long-term Treasury bonds in 1982 at 14 percent yields and held them for decades experienced enormous capital gains on top of the interest payments. Bonds delivered excellent real returns during this period. The “stocks and bonds” portfolio worked because both assets were often rising at the same time.

That 40-year tailwind is over. Interest rates hit historic lows near zero in 2020 and 2021. From zero, there is nowhere left to fall. The era of bonds appreciating as rates decline is behind us. What remains is an asset class paying modest yields against a backdrop of persistent government debt expansion and the inflation that comes with it.

The financial advice built on bonds as the safe asset was built for a world where rates were high and falling. We are not in that world anymore.

The 60-40 Portfolio Is Not What It Used to Be

The classic retirement portfolio recommendation is 60 percent stocks and 40 percent bonds. This allocation worked for decades because the two asset classes were largely uncorrelated – when stocks fell, bonds often rose, smoothing out the overall portfolio.

In 2022, that relationship broke down. Stocks fell. Bonds fell harder. The 60-40 portfolio had one of its worst years in history because both halves of the portfolio moved in the same direction at the same time. Investors who thought they were diversified discovered that their bonds provided no protection when the threat was inflation rather than recession.

The 60-40 portfolio is not dead. For certain investors in certain situations, it still makes sense. But accepting it as the default safe allocation without understanding what it is actually exposed to – inflation risk, interest rate risk, currency debasement risk – is not the same as understanding it.

What I Hold Instead

My answer to the stability question is hard assets – things with real intrinsic value that hold purchasing power as the money supply expands.

Bitcoin is my primary hard asset. A fixed supply of 21 million coins enforced by code, no central authority that can inflate it, and a monetary policy more predictable than any government in history. When the government expands the dollar supply, Bitcoin’s fixed supply means it holds its value relative to dollars over time. That is the opposite of what bonds do.

Gold is the other hard asset in this category. Five thousand years of history as a store of value. Governments have debased paper currencies repeatedly throughout history – gold has survived every one of those debasements. I do not personally hold gold because I believe Bitcoin is superior in every practical way for a working person today. But gold belongs in the hard assets category and has a place in portfolios for investors who want that long track record and lower volatility.

In my portfolio allocation framework, I replace the bond allocation entirely with hard assets. Instead of 60 percent stocks and 40 percent bonds, I recommend 75 percent equities spread across large, mid, and small cap index funds, and 25 percent hard assets in Bitcoin or gold. The equities give you real economic growth. The hard assets give you purchasing power protection. Neither one depends on the government’s good monetary behavior to work.

When Bonds Do Make Sense

I want to be honest rather than absolute. There are situations where bonds are appropriate.

Short-term Treasury bills – T-bills with maturities of weeks or months rather than years – carry far less interest rate risk than long-term bonds. If you need capital preservation over a short period and want to stay in cash-equivalent assets, short-term T-bills are a legitimate option. The duration risk that crushed long-term bonds in 2022 does not apply in the same way to short-term instruments.

I Bonds – inflation-protected savings bonds issued by the US Treasury – adjust their interest rate with inflation. They are not subject to the same purchasing power erosion as fixed-rate bonds. The purchase limits are restrictive – $10,000 per person per year – but within those limits they are one of the few government bond products that addresses the core inflation risk I have outlined here.

Investors who genuinely need stable, predictable income in the near term – retirees drawing down assets, people with specific short-term cash needs – may find some role for bonds in their plan. The key is understanding exactly what risk you are accepting and why it is worth it for your situation.

For a working person in their 20s, 30s, or 40s with a long investment horizon, I do not see a compelling case for significant bond exposure in today’s environment. The math does not support it and the incentives of the issuer work against you.

The Bottom Line

Government bonds are not scams. They are not worthless. They are a specific financial instrument with specific characteristics – and those characteristics are poorly suited to the current monetary environment.

You are lending dollars to a government that controls the printing press and has $36 trillion in reasons to use it. You are receiving a fixed return denominated in those same dollars. Every dollar created between now and your bond’s maturity date dilutes the real value of the dollars being returned to you.

The financial industry has been recommending bonds as the safe asset for so long that the recommendation has become reflexive. The reasoning behind it – falling interest rates, low inflation, strong dollar purchasing power – applied to a specific 40-year window that is now closed.

Understand what you own. Know what risks you are actually carrying. And if the goal is to protect purchasing power over the long run, consider whether a dollar-denominated promise from the world’s largest debtor is really the tool for that job.