Are Treasury bonds really 'risk-free,' or is that a myth?

U.S. Treasuries are considered free of default risk, the government is extremely unlikely to fail to repay, which is why they're called 'risk-free' in finance textbooks. But that label is misleading, because they carry two other real risks. First, interest-rate risk: if rates rise, the market price of existing Treasuries falls, and long-term Treasuries can drop significantly, as many investors learned painfully in 2022.

Second, inflation risk: a bond paying 3% loses purchasing power if inflation runs at 5%, so you can lose money in real terms even while getting every promised dollar back. 'Risk-free' means free of default risk only, not free of all risk. If inflation is your worry, TIPS or I-bonds adjust for it; if rate swings worry you, shorter maturities help. No investment, including Treasuries, is truly free of every kind of risk.