How Risky Are Government Bonds

Investing in government bonds has become a very common investment strategy in recent years. Here are the basics of government bonds and how much risk you are taking on when you invest in one. 

Risk of Default

The main risk with bonds is that the entity that issues them will default. When you invest in a corporate bond, for example, you worry whether the company will be around long enough to give you your money back at the end of the term. Accordingly, when you invest in a government bond, your investment should be safe as long as that government stays intact. If you are investing in United States Treasury bonds as a citizen of the U.S., this is a very safe form of investment.

However, if you are investing in foreign government bonds, then you take on a certain amount of risk. This is especially true when you invest in countries that are in unstable regions of the world. When you invest in a foreign bond, your right to collect if the entity dissolves goes away. Since you are the citizen of another country, you have no enforceable claim on your money. U.S. Treasury bonds are the much safer investment for you.

Currency Risk

If you were to ignore the initial risks of investing in a foreign government bond, another risk that may hurt you is the currency risk. When you invest your money in a foreign currency, you can experience fluctuations in the exchange rate. Therefore, you risk your capital again to the foreign currency market before you can utilize it. 

Inflation Risk

Another risk that you might want to consider when investing in government bonds is that of inflation. When you invest in government bonds, you are using your money to invest in something that pays a very low rate of interest compared to other investments. For example, you may get only 1.2 percent for a U.S. Savings bond. You have to determine if getting paid for your money at this rate will help you keep up with inflation. 

This risk is referred to as the opportunity cost of the investment. You could put your money into the stock market and receive a much higher rate of return. Therefore, you are missing out on the difference between what you could be earning on the money and what you are earning with the bond. 

The Verdict

Losing your investment is not considered a risk with U.S. Treasury bonds. However, you will not make as much of a return as you could through other means. 

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