Government Bonds Explained: How Governments Raise Capital
Government bonds are debt securities issued by national governments to finance public spending. While tax revenue is the primary source of government funding, governments often issue bonds to cover budget shortfalls, maintain financial reserves, or refinance existing debt that is reaching maturity. In most cases, these bonds are issued in the country’s domestic currency.
To attract international investors who may be concerned about exchange rate fluctuations, some governments also issue bonds in widely used global currencies such as the US dollar or the euro.
In the United States, government bonds are commonly known as Treasurys. There are four main categories of U.S. Treasury securities:
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Treasury bills, or T-bills, mature in one year or less; the shortest available maturity is four weeks.
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T-notes are available in maturities of 2, 3, 5, 7 and 10 years, and have a coupon payment every six months.
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T-bonds mature in 30 years and also come with semi-annual coupon payments.
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Treasury Inflation-Protected Securities (TIPS) are bonds whose principal is periodically adjusted for inflation.
US Treasurys are backed by the “full faith and credit” of the US government. This, and a strong repayment record, make Treasurys among the safest investments anywhere.
Government bonds in different countries have different names and available maturities. For example, UK government bonds are called gilts, and the local equivalent of TIPS are called index-linked gilts. German government bonds are collectively called Bunds, ranging from six-month Bubills through five-year Bobls to 10- or 30-year Bunds, among others.
What else do you need to know about bonds?
Want to learn more before deciding what’s your optimal bond allocation? You might want to check out these other articles to deepen your knowledge.
- What is a bond? (our main article in the bond section)
- What is a bond yield?
- How do bonds work?
- What happens when a bond comes due?
- How to invest in bonds?
- How to buy bonds?
- Where to buy bonds?
- How to buy treasury bonds?
- What are convertible bonds?
- What are junk bonds?
- What is a secured bond?