Can Government Bonds Be Junk Bonds?

As talk about corporate junk bonds rises above a murmur in the investing world thoughts about the relationship of “junk status” to government deficits and debt levels may (should) filter into your thinking about buying government issued and backed bonds.

Take a moment to reflect upon what happened to Detroit’s bond holders by reading this article: Detroit Bond Holders Taught Painful Lesson in Bankruptcy.

Now, take a few minutes to scan, – or better yet, take a few more minutes to read – this little PDF from the Council of State Governments discussing the idea of the U.S. Congress expanding the authority of the U.S. Bankruptcy Courts over State petitions for bankruptcy relief: State and Local Bankruptcy, Municipal Bonds and Pensions.

One quote from the above linked PDF:

The national conversation now underway whether Congress should enact preemptive authority for states to file for bankruptcy is treacherous because of its unintended consequences. The mere existence of a federal law allowing states to declare bankruptcy would only serve to increase interest rates, rattle investors, raise the costs of state government, create more volatility in fi nancial markets, and erode state sovereignty under the 10th Amendment to the U.S. Constitution.

Now, ask yourself:

  1. Do I know the level of debt already aggregated by the government agency (municipal, county, state, special district, etc) issuing bonds?
  2. Has the existing governing body exhibited a willingness to raise taxes to pay their obligations and fund government programs?
  3. Have I examined the bond rating for this obligation? What about insurance to cover the bond in the event of a default?
  4. Lastly, in the event of a series of defaults how will the insurance stand up? Is there “insurance on the insurance”?

Government backed debt is as secure a debt obligation as you can invest your money in. However, even a government issued obligation is not perfect. So, do your homework. Talk to a professional with knowledge of the government bond market.

 

Types of Government Bonds

As far as choice goes, the federal government offers an array of bonds, treasuries, and other investment options to any US citizen. Of the bonds offered, the more commonly purchased are government bonds, t-bills, and i-bonds.

Government Bonds

Government bonds considered the safest of the bond investments. These bonds are normally issued in terms of 30 years and pay interest every six months until they mature.

The cost can be whatever market rate demands.  Thus the price can be any of three options; equal to the face value if the bond and market return are equal, higher if the bond offers a higher return than the market risk requires, or less if the bond is offering less than the market expects for the risk.  When one feels their investments in the market are too risky and they are too venerable to a recession could always purchase these to help minimize such fears.

T-Bills

T-bills are another investment option the federal government sells. These bonds mature in one year or less, and are always sold at a discount from their face value. All profit from purchasing a t-bill comes from the difference in the face value and the actual cash amount paid for the t-bill.  There are no interest payments on the t-bills.

I-Bonds

I-bonds or inflation-indexed bonds, offer a way to help protect against inflation. These types of bonds are considered to be low-risk bonds. I-bonds protect the investor from inflation. Inflation indexed bonds comprise over $1.5 trillion of the international debt market.

Buying Government Bonds

To purchase any and all of these bonds, one does not even have to leave the comfort of one’s own home.  Most purchases can be made from TreasuryDirect, which is commonly used by individuals purchasing government bonds. Other purchases of government bonds can be made through brokers and banks or directly through the Federal Reserve Banks.

By – Domenic Gabriella for GovernmentBond.com

What Is A Government Bond

What is a government bond?

A government bond is:

  • A written promise or agreement – as in “being bound” or “my word is my bond” – which is usually contained in a writing or document called a “bond”
  • Which promise is made by a government, or a governmental or quasi-governmental agency, that includes State governments, county governments, municipal governments or “munis”, and various quasi-governmental agencies such as “bridge and port authorities”, “turnpike authorities”, “sewer authorities”, “water districts”, “economic development authorities” and others
  • Which usually includes an agreement to pay interest at a certain rate or according to a formula
  • On funds deposited, paid – or shall I say “loaned” – to the government
  • Which deposit or loan, when it comes to repayment, is typically backed by the “full faith and credit” of the government or agency
  • Which means backed by the taxpayers (within the jurisdiction of that governing agency) and the ability of that governing agency to fund expenses by imposing taxes or fees (such as bridge or highway tolls)
  • Which deposit is about as secure as an any agreement to re-pay can possibly be, thanks to the unlimited ability of citizens to pay taxes and fees. ;)
  • Which “bond interest” may either accumulate or be paid in installments, and which principal or deposit or “loan” (to the government) will eventually be repaid by the return of the principal payment, too
  • Which interest in many cases will, unlike other forms of interest, be tax free
  • Which “bond” amounts to loaning a government money to pay its expenses
  • Which loan often is used for the public good, in building infrastructure and other public projects
  • But which loans can also be used to enable deficit spending, i.e., spending on government activities without paying for them “in the here and now” by raising taxes

And that, my friend, is the short version answer to the question: “What is a government bond?”