Introduction
Government bonds are debt securities issued by governments to borrow money from investors. They play a central role in financial markets and are used to finance public spending, manage government funding needs, and provide investors with a broad range of fixed-income investments.
Government bonds are often described as relatively safe investments, but that description requires context. Credit risk, interest-rate risk, inflation risk, currency risk, and other factors depend on the issuer and the specific security.
For U.S. investors, Treasury securities are the most familiar example. Other national and local governments also issue debt with their own structures and risk profiles.
What are government bonds?
A government bond is a debt obligation issued by a government or government-related entity. By purchasing the security, an investor lends money to the issuer under specified terms.
Depending on the security, investors may receive periodic interest payments, a payment at maturity, or a combination of both. The issuer’s ability and willingness to meet these obligations is a key part of the bond’s credit risk.
Like other bonds, government securities can trade in secondary markets before maturity, which means their market prices can rise or fall.
Why governments issue bonds
Governments regularly have financing needs that are not met by current tax and other revenues. Issuing debt allows them to fund expenditures, refinance maturing obligations, and manage cash flows over time.
Bond issuance also creates securities that can serve important functions in financial markets. Highly traded government debt is commonly used as collateral and as a reference point for interest rates and the pricing of other fixed-income securities.
U.S. Treasury securities
The U.S. Department of the Treasury issues marketable securities with different maturities and payment structures. Treasury bills, notes, and bonds are all backed by the U.S. government’s obligation to pay according to their terms, but they differ mainly in maturity and how investors receive returns.
Treasury bills
T-bills are short-term securities with maturities of one year or less. They are generally sold at a discount or at par and pay their face value at maturity rather than making traditional coupon payments.
Treasury notes
T-notes have original maturities of more than one year through ten years and generally pay interest every six months.
Treasury bonds
T-bonds are longer-term securities with original maturities greater than ten years and generally make semiannual interest payments.
The Treasury also issues other securities, including Treasury Inflation-Protected Securities, or TIPS, whose principal is adjusted based on changes in the Consumer Price Index.
Government bond yields
The yield on a government bond reflects its price and expected cash flows. Yields are influenced by monetary policy expectations, inflation, economic conditions, maturity, supply and demand, and perceptions of the issuer’s creditworthiness.
Government bond yields are important beyond the bond market itself. U.S. Treasury yields, for example, are widely used as reference rates when investors evaluate other bonds and financial assets.
Our guide to bond yields explains the relationship between price, coupon, current yield, and yield to maturity in more detail.
Government bonds vs corporate bonds
| Feature | Government bonds | Corporate bonds |
|---|---|---|
| Issuer | Government or government-related entity | Company |
| Main credit consideration | Issuer’s fiscal position and ability to meet obligations | Company’s financial strength and ability to service debt |
| Yield | Varies by issuer, maturity, inflation expectations, and rates | Usually reflects both market rates and company-specific credit risk |
| Use of proceeds | Public financing and government funding needs | Business investment, acquisitions, refinancing, and other corporate purposes |
Investors can read more about company-issued debt in our guide to corporate bonds.
Risks of government bonds
Government debt can carry very different risks depending on the issuer. Even when default risk is considered low, a bond’s market value can fall when interest rates rise. Longer-term fixed-rate securities can be especially sensitive to changing rates.
Inflation is another important risk because it can reduce the purchasing power of fixed interest and principal payments. Foreign government bonds can also expose U.S. investors to currency movements, political conditions, and differences in market liquidity.
Some governments have a much stronger capacity to service debt than others. Investors should therefore avoid assuming that all sovereign or government bonds have the same credit quality. See our broader guide to bond risks for more detail.
Why investors use government bonds
Government bonds can provide interest income, a defined maturity, and exposure to an asset class that may behave differently from stocks. Highly liquid government securities can also make it easier to adjust portfolio risk or hold assets intended for future spending needs.
The appropriate role depends on the specific security. A three-month Treasury bill, a 30-year Treasury bond, an inflation-protected security, and a foreign sovereign bond can respond very differently to changes in interest rates, inflation, and market conditions.
Key takeaways
- Government bonds are debt securities issued to finance government funding needs.
- U.S. marketable Treasury securities include bills, notes, bonds, and inflation-protected securities.
- Government bond prices can change before maturity, even when credit risk is low.
- Interest rates, inflation, maturity, and credit quality all influence government bond returns and risks.
- Not all government issuers have the same ability to repay debt.
- The characteristics of the specific security matter more than the government bond label alone.