Government bonds offer a steady, guaranteed source of income. They are usually considered the safest bonds to invest in because of the relative stability and reliability of national economies.
What are Government Bonds?
Government Bonds are bonds issued by a government entity, as opposed to a private issuer such as a corporation.
Why You Should Buy Government Bonds
Because government bonds are issued by large, stable, national entities, they are among the least risky bond investments one can make. While government credit ratings play a role in international economics, the individual investor is not as affected by a country’s creditworthiness as they would be if they invested in a corporate bond.
Government Bond Issuers
A supranational agency, such as the World Bank, levies assessments or fees against its member governments. Ultimately, it is this support and the taxation power of the underlying national governments that allow these organizations to make payments on their debts.
The “central” or national governments also have the power to print money to pay their debts, as they control the money supply and currency of their respective countries. This is why most investors consider the national governments of most modern industrial countries to be almost “risk-free” from a default point of view and are therefore likely to purchase government bonds from them.
Provincial or State Governments
Provincial or state governments also issue debt, depending on their constitutional ability to do so. Canadian provinces, notably Ontario, borrow more than many small countries. Most investors consider provincial or state issuers to be very strong credits because they have the power to levy income and sales taxes to support their debt payments. Since they cannot control monetary policy like national governments, they are considered lesser credits than national governments, but still a popular issuer of government bonds.
Municipal or Regional Governments
Cities, towns, counties, and regional municipalities issue government bonds supported by their property taxes. School boards also issue bonds, supported by their ability to levy a portion of property taxes for education.
Many government-related institutions issue bonds, some supported by the revenues of the specific institution and some guaranteed by a government sponsor. In Canada, Federal government agencies and Crown corporations issue bonds. For example, The Federal Business Development Bank (FBDB) and the Canadian Mortgage and Housing Corporation (CMHC) bonds are directly guaranteed by the Federal government. Provincial crown corporations, such as Hydro One and Hydro Quebec, are guaranteed by the Provinces of Ontario and Quebec, respectively.