Finance

Government bonds: definition, opportunities and risks

Countries use government bonds to borrow money from banks and private individuals. You too can grant a state such a loan – with advantages for your securities account. What you should know about government bonds.

If you need money for a purchase, for example a new car, you can get a loan from the bank and repay it later. States can also finance their expenses with foreign money. To do this, they issue so-called government bonds, which in turn banks or you as a private investor can buy.

But how does it work exactly? And why should I, as an investor, invest in government bonds at all? t-online will explain it to you.

What are government bonds anyway?

Government bonds are fixed income securitiesissued by states. That means: through Government bonds the respective state borrows money from banks but also private individuals against interest.

The interest stipulated in the paper is distributed annually. The Maturity of government bonds is often ten years. However, there are also shorter and longer terms.

In addition to government bonds, there are also corporate bonds. They work in a similar way to government bonds, except that companies borrow money from private individuals. How exactly bonds work read here.

What types of government bonds are there?

Government bonds are all about that countrythat issues the bond. Because the risk and the interest depend on it: each lower the credit rating of a country, so its creditworthiness, the more higher the risk, but also the interest to be paid.

In addition, the various types of bonds that a state issues also play a role. They also differ Terms. In Germany, for example, there are federal bonds, federal treasury notes or federal bonds. An overview:

  • Federal bonds are the standard form of German government bonds with a term of either ten or 30 years.
  • Federal bonds on the other hand only run for five years – so they are suitable for medium-term investments.
  • The runtime of Federal Treasury Notes is even shorter, only two years. There are also sub-types with even shorter terms.
  • Federal Treasury Bills however, have not been issued by the state since the end of 2012; the last federal treasury note expired in September 2019.

What role does the ECB play in government bonds?

A central goal of the European Central Bank (ECB) is the so-called Price stability. In other words, the ECB is trying to keep inflation, i.e. the rise in prices, at a stable level. In the medium term, it is aiming for a Inflation rate of just under two percent at.

The reason for the goal of price stability: Stagnating or falling prices can induce consumers and companies to postpone investments. That can slow the economy down.

In order to achieve its goal, the ECB has two main instruments: the Lowering the key rate and buying government bonds. The key rate has been at zero percent for years, so the options are limited here. That is why it tries to regulate the rate of inflation by buying bonds.

Because: The money that the ECB has on the Bond purchases transfers to the states, so the theory goes, sooner or later also comes into circulation – and causes rising inflation. At the same time, the greater demand for bonds from the ECB will lower the interest that the finance ministers have to pay, so their debts will become cheaper.

In order to cushion the economic consequences of the Corona crisis, the ECB has once again significantly expanded its bond purchases. Critics therefore accuse the ECB of indirectly financing states by purchasing government bonds, which it is expressly prohibited from doing.

How can I buy government bonds?

You have several options for investing in bonds. For example, you can direct bonds – or rather parts of government bonds.

Another variant is: You invest via so-called Pension funds in government bonds. This is basically a basket of investment funds that are used to buy and sell various bonds at market value.

Another possibility are so-called Bond ETFs. In these, a computer algorithm simulates a bond index, which shows the performance of the bonds in the index. With a bond ETF, you invest in all of these securities. How it works, read here.

Is it worth investing in government bonds?

Yes, it can be profitable despite the low interest income. Experts advise that in addition to stocks or equity funds, you should also have government bonds – as well as corporate bonds – in your securities account when security. Because: government bonds are considered very safe, but low-return investment.

Important: Not all government bonds are equally low-risk. Buying bonds from heavily indebted countries increases the risk of losing your money. On the other hand, the return is also higher. Bunds, on the other hand, hardly yield any returns, on the contrary: investors sometimes even pay to lend money to the German government.

Government bonds can Compensate for fluctuations in the depot, so losses from stocks. Depending on your risk appetite, you should therefore invest a certain percentage in bonds.

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