Why government bonds could see you through the good times and the bad
Government bonds might not be the most razzle-dazzle investment, but they’ve been proved time and again to be an important part of many balanced portfolios.
So here’s all you need to know about how to buy government debt and why the move could see you through the good times and the bad. 🎯
How government bonds work and what they can add to your portfolio.
If you’ve ever freaked out at the size of your student loan or bank overdraft, take comfort in the fact that the United States government owes $23 trillion – more than the entire US economy generates in a year.
That US sovereign debt is owed to investors in the country’s government bonds – some big ones, sure, but some simply normal, financially savvy Wealthyhood users just like you.
What is a government bond?
As you may have figured out, bonds are essentially loans. Governments take them out in order to raise money for infrastructure spending, wars, or simply to pay back the interest on their existing loans.
When an investor buys a bond, they’re lending its “issuer” money. In return, they get paid interest for a certain period of time. Plus, when the bond “matures”, they get back the notional value of the bond too.
(Corporations, of course, issue bonds too – although most of them don’t use the proceeds to fund wars. We cover these – the bonds, not the wars – in a separate Corporate Bonds learning guide, so be sure to check that out if you’re interested in learning more.)
A bond example 🤔
👉🏼 Let’s say the US government issues a bond with a face value (or par value) of $100, a 1% coupon, and a 30-year maturity. In plain English, buying that bond will cost you $100, and you’ll be paid 1% of that amount each year (i.e. $1) for 30 years. 30 years from now, the bond will mature, and the US will repay your $100 – leaving you with $130 in total.
That’s a low return but a reliable one – it’s extremely unlikely that the US government will “default” on its debt and fail to cough up, so you’re almost sure to get your $100 back plus interest. Insulating you from losses in this way is one big reason investors like government bonds.
Bonds in the secondary market
But it’s not the only reason – and nor do you have to be content with small potatoes. In the above example, you’ll make just $30 if you hold on to the bond for 30 years. But you could sell it on to someone else before then: government bonds trade in a lively secondary market, changing hands just like stocks.
That means their prices fluctuate – so you might be able to sell your $100 bond for $110. Or you might find a bond with a $100 par value trading for $90 – and if you keep it until maturity, you’ll still be paid $100. That’s not to mention the $1 interest payments, which will now offer a higher yield (the ratio of coupon payments to a bond’s trading price) since 1/90 is a bigger return on investment than 1/100).
Those price changes can open the door to a tidy profit: in fact, since the 1980s, some bonds’ prices have more than doubled. 🤑
Government bonds in your portfolio
That’s why many investors think government bonds form a key part of any portfolio: they offer returns, stability, and diversification away from stocks.
In this guide, we’ll give you a primer on the market – explaining how to evaluate government bonds, examining different investing strategies, and exploring the practicalities of getting involved. First off, however: What affects bonds’ prices?
Government bonds can offer security, diversification, and consistent returns – which is why they’re often seen as crucial to forming a balanced investment portfolio. ⚖️
Keep in mind that when you invest, your capital is at risk. This learning guide is for information purposes only and is not intended as investment advice.