Government Securities
Government securities are debt instruments of a sovereign government. They sell these products to finance day-to-day governmental operations and provide funding for special infrastructure and military projects. These investments work in much the same way as a corporate debt issue. Corporations issue bonds as a way to gain capital for buying equipment, funding expansion, and paying off other debt. By issuing debt, governments can avoid hiking taxes or cutting other areas of spending in the budget each time they need additional funds for a project.
After issuing government securities, individual and institutional investors will buy them to either hold until maturity or sell to other investors on the secondary bond market. Investors buy and sell previously issued bonds in the market for a variety of reasons. They may be looking to earn interest income from the bond’s periodic coupon payments or to allocate a portion of their portfolio into conservative risk-free assets. These investments are often considered a risk-free investment because when it comes time for redemption at maturity, the government can always print more money to satisfy the demand.
KEY TAKEAWAYS
- Government securities are government debt issuances used to fund daily operations, and special infrastructure and military projects.
- They guarantee the full repayment of invested principal at the maturity of the security and often pay periodic coupon or interest payments.
- Government securities are considered to be risk-free as they have the backing of the government that issued them.
- The tradeoff of buying risk-free securities is that they tend to pay a lower rate of interest than corporate bonds.
- Investors in government securities will either hold them to maturity or sell them to other investors on the secondary bond market.
| Pros Government securities can offer a steady stream of interest incomeDue to their low default risk, government securities tend to be safe-haven playsSome government securities are exempt from state and local taxesGovernment securities can be bought and sold easilyGovernment securities are available through mutual funds and exchange-traded funds | Cons Government securities offer low rates of return relative to other securitiesThe interest rates of government securities don’t usually keep up with inflationGovernment securities issued by foreign governments can be riskyGovernment securities often pay a lower rate in a rising-rate market |
Examples of Government Securities
Savings Bonds
Savings bonds offer fixed interest rates over the term of the product. Should an investor hold a savings bond until its maturity they receive the face value of the bond plus any accrued interest based on the fixed interest rate. Once purchased, a savings bond cannot be redeemed for the first 12 months it is held. Also, redeeming a bond within the first five years means the owner will forfeit the months of accrued interest.
T-Bills
Treasury bills (T-Bills) have typical maturities of 4, 8, 13, 26, and 52 weeks. These short-term government securities pay a higher interest rate return as the maturity terms lengthen.
Treasury Notes
Treasury notes (T-Notes) have two, three, five, or 10-year maturities making them intermediate-term bonds. These notes pay a fixed-rate coupon or interest payment semiannually. Yields on T-Notes change daily.
Treasury Bonds
Treasury bonds (T-Bonds) have maturities of between 10 and 30 years. These investments pay semiannual interest returns. The government uses these bonds to fund deficits in the federal budget. Also, as mentioned earlier, the Fed controls the money supply and interest rates through the buying and selling of this product.