Why do longer maturity treasuries normally have higher yields than shorter ones? The conventional reason I see for this everywhere is that &quot;investors take on larger risk locking up their money for longer.&quot;
This is unsatisfactory for me because of the secondary market. The price of a 30-year bond, for example, should be increasing by YTM% (yield-to-maturity) since the NPV of all future outflows increases (less time till the outflows).
So comparing a 30-year bond and a 1 month bill, why can't an investor buy the 30-year bond, hold it for a month, then sell it?
Both bond and bill are exposed to interest rate risk the same time. Furthermore, the sum of the bond's outflows + higher price, as mentioned above, should produce YTM% of value. So now since the 30-year bond's yield is higher than the 1 month bill, the investor should make more with the 30-year bond.
Existence of secondary market only reduces liquidity risk. It does not affect the inherent risk of purchasing long term debt because situation can change. For example, long term bonds have higher interest rate risk because there is higher chance that interest rate will change in long term than in the short term (and raise in the interest rate will lead to lower bond price).
People at a secondary market will not buy bonds from you at any price you will fancy. Any prospective buyer will take into account that long term debt is more risky even if there is a secondary market. Advantage of secondary market is that it makes the bonds more liquid so it primarily reduces liquidity risk but virtually all other sources of risk remain unaffected, and generally (from a perspective of a buyer) the risk of buying debt increases with the time to maturity of the debt and so the buyer has to be compensated for that (plus there is the time value of money - money now is always better than money tomorrow). For example, the person that buys the bond from you will have to either factor in the price that either they will have to hold the bond to maturity (with all risks that carriers) or find another buyer who will then have to factor in the same problem. The bond will have to end up in someone's hands at the end of the day so all disadvantages of holding that long term debt will be priced at secondary market as if the bond would be held to maturity from the date the transaction is made (save for liquidity related issues).
Consequently, in the end regardless of whether secondary market exists it generally does not change riskiness of purchasing bond save for the liquidity risk. Since longer term debt is riskier for buyer (e.g. interest rate risk etc.) they need to be compensated more for purchasing it than in the case of short term debt that carries less risk.