Let’s be honest government bonds don’t sound exciting like stocks or crypto but there is the truth that these bonds are one of the safest and most……
Let’s be honest government bonds don’t sound exciting like stocks or crypto but there is the truth that these bonds are one of the safest and most important tools in the world of investing.
What are the government bonds?
Firstly we will understand about what is bonds, in bonds we lend money to corporations and institutions, in return they promise us to pay fixed interest rate and at maturity they will pay us our principal value.
Now we will discuss about government bonds, in these bonds we lend money to government, in return they promise us to pay fixed return or principal at maturity. These bonds are considered very safe because government rarely fails to pay back interest, especially countries like USA, UK, GERMANY and INDIA.
Different types of government bonds
T-Bills (Treasury Bills)
T-Bills are very short term bonds (for a week to a year), in this we will not get any interest but we buy bond at cheap rate and sell it at high price. Great for short term savings.
Example: you pay $960 now and in future you will get $1000.
T-Notes (Treasury Notes)
T-Note bonds are medium term bonds (2 to 10 years), in return they promise to pay interest rate half yearly (twice a year)
Example: you buy a $1000 note or after 6 months you will get return at which you discussed when you purchased the bond.
T-Bonds (Treasury Bonds)
T-Bonds are used for long term (20 to 30 years). These bonds are paid interest like T-Notes and this bond is great for retirement and for long term savings.
TIPS (Treasury Inflation-Protected Securities)
TIPS bonds help investors to protect their money from inflation, the value of bonds goes up when the inflation goes up that’s why you don’t lose your purchasing power.
Good for times when inflation is rising and you don’t want your money to lose value.
Savings Bonds (Series I and EE)
Savings bonds are meant for individuals and for families. Series I bonds are adjusted for inflation and EE bonds double the money in 20 years if you hold it till 20 years.
These bonds are simple for families or for individual-like savings for children education.
Why government bonds is so important?
Government bonds are the safest bonds, sometimes people take risk free return as a government bonds return. Government bonds is that safe.
Government bonds are the stable bonds, their prices don’t go up or down like stocks.
Government bonds are reliable income, you will get return at a decided date and the default risk of an interest is very low.
Government bonds are easy to sell, you can sell this bond any time you want it to sell.
Government bonds balance the portfolio, when stocks go down then bonds often stay stable or go up.
They may not grow like stocks or crypto but they protect our money or grow also at steady rate.
Are government bonds really risk free?
Not 100%. When you buy bond you have to keep something in mind like
Interest risk: if interest rate goes up the price of older bonds goes down.
Inflation risk: if the inflation is rising so fast then the value of your interest can lose its value.
Opportunity cost: you may miss better return elsewhere, if you invest your money in corporate bonds you will get extra return relatively to government bonds.
But compared to other options, risk is negligible and bonds help in your portfolio to reduce your overall risk.
What about bonds from other countries?
You can invest your money in countries like Germany, Japan, and the UK, these are also safe bonds and you can invest with the help of ETF or global bonds fund.
There are also bonds from the emerging markets like Brazil, South Africa, or India, these bonds offer higher interest rates but they come with certain risks like currency risk or political issues.
Conclusion
Government bonds don’t look exciting but they are the safest and one of the smartest ways of investing our money. If Warren Buffett trusts the government bonds to protect his portfolio then we have to take them seriously.