Ask Matt: How risky is investing in bonds?

• Bonds have been less volatile than stocks over time, but there are still major risks
• Default risk is becoming more of a danger as more companies struggle with their interest payments
• The danger that prices will rise at a fast clip is one of the biggest dangers bond investors face

USA TODAY markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at mkrantz@usatoday.com.

Q: What are the risks of staying invested in bonds?

A: If you're afraid of stocks, buy bonds, right? That's the common belief held by many investors.

It's true that bonds, traditionally, have been less volatile than stocks over the long term. A really bad year for bonds does nowhere near the damage that can be inflicted by a bear market for stocks.

The worst year ever for intermediate-term U.S. Treasuries was a 5.1% decline in 1994, Morningstar says. Compare that with the worst year for large U.S. stocks, 1931, when the Standard and Poor's 500 index lost 43.3%.

But while bonds' volatility and returns are smaller than stocks', don't make the mistake of thinking they're risk-free. If you're invested in bonds issued by companies, you face default risk, for one thing. That's the risk that the companies won't be able to pay you back. The U.S. default rate is expected to hit 3.7% by June 2013, S&P says.

A less common danger for bond investors, but one that's still possible, is liquidity risk. There's always a danger you won't be able to find a buyer for some bonds issued by smaller borrowers.

If you invest in just U.S. government debt, then default and liquidity aren't your biggest worries.

Next up on the list of worries for bond investors is interest rate risk. If interest rates rise, then the value of your bond payments are worth relatively less -- and so are the bonds themselves if you need to sell them.