Government bonds 2025 – is it worth investing?
If you want to further diversify your portfolio, government bonds could be an option. They are an interesting tool for expanding the security component of your own portfolio. In this article, you will learn exactly how government bonds work and what you should know before investing.
In brief:
- The government can raise money to implement projects through government bonds.
- Investors receive the borrowed money back, including interest.
- The credit rating of the respective countries plays a decisive role and indicates a country’s solvency.
- There is a type of government bond ETF that allows you to invest in government bonds in a diversified manner.
What is a government bond?
Government bonds can be explained as fixed-interest debt securities. The buyer of the government bond lends the government a certain amount of money. In return, the owner receives two promises from the government. The buyer gets the nominal value, i.e. the same amount of money, back at the end of the agreed period. In addition, a fixed interest rate on the amount, also known as a coupon, is payable.
The length of time between purchase and repayment of the money, including interest, by the state can vary considerably. Some bonds mature after one year, while others only mature after 30 years or even later.
Good to know:
Government bonds can be regarded as an important political tool. They are an important financial pillar for countries. Governments use government bonds to finance and implement their own projects. Private investors, on the other hand, benefit from a secure investment opportunity, depending on the country.
This also explains the biggest risk associated with government bonds: if the country in question goes bankrupt, it will no longer be able to repay the money, including interest. When selecting government bonds, it is therefore important to consider the individual risk of the country in question.
Important features and terms relating to government bonds
You should be familiar with the following terms in order to understand government bonds as an asset class:
- Maturity date: The maturity date refers to the day on which the nominal value of the bond is repaid to the buyer. It should be noted that the terms vary greatly. Government bonds are generally considered a long-term asset class.
- Issuer: The issuer is the entity that issues the bond. In the case of government bonds, the issuer is the respective government. Bonds can be issued by industrialised countries such as the United States or Germany, emerging markets such as Brazil, or less developed countries.
- Coupon: The coupon or coupon rate of a government bond refers to the annual percentage of the nominal value that is paid to the bondholder.
- Nominal value: The nominal value is the redemption value of a bond. This is repaid on the maturity date.
- Currency: Bonds are available in different currencies. Some of these are considered rather unstable, which is why some countries prefer to issue their bonds in dollars in order to attract more investors.
- Bond price: In theory, the issue price should correspond to the nominal value. However, the price may fluctuate significantly after the bond has been issued.
- Yield: The yield on government bonds is influenced by various factors: interest rate, maturity, the government’s solvency and possible currency changes.
- Credit rating: A credit rating is an assessment of a country’s ability to pay its debts.
How are government bond prices determined?
Interest rate developments are important for bond prices. When current market interest rates rise, bond prices fall. This happens because new government bonds with higher interest rates and the same maturity come onto the market, causing the prices of old bonds to fall. If they remained the same, no one would buy old bonds with lower interest rates.
As with other asset classes, supply and demand also play a role. Demand depends on whether the asset class is considered attractive. The supply of government bonds is determined by the respective countries. They issue bonds when they need new capital to implement new projects.
Good to know:
Inflation also influences the price of government bonds. If inflation rises and the purchasing power of the coupon decreases, the coupon payments are worth less to investors. High inflation often leads to interest rate hikes by central banks. Higher interest rates then lead to lower market prices for bonds.
Credit ratings contribute to the price performance of government bonds. Even though government bonds are generally considered safe investments, there are countries that may default on their payments. Bonds that are considered riskier are associated with lower prices.
What does creditworthiness mean?
Creditworthiness also influences the price performance of a government bond. Creditworthiness describes a country’s ability to pay. Government bonds from countries with good creditworthiness have a low risk of default. Countries with poor creditworthiness may default on their payments, and the risk is considered to be relatively high.
Attention!
This risk also affects the coupon. Countries with good credit ratings are characterised by lower coupon rates, while countries with poor credit ratings offer bonds with higher coupons due to the increased risk. It is possible that the credit rating may be downgraded during the term of the bond.
Government bonds with poor credit ratings are considered speculative and high-risk. They are often referred to as ‘junk bonds’. Due to the increased risk, they attract investors with comparatively high potential returns.
Countries with very good credit ratings may even see negative interest rates. This has been the case in Germany in recent years, for example. The following overview will help you to realistically assess countries with their respective credit ratings and risks:
| Country rating | Meaning |
| AAA /Triple-A | Extremely strong solvency |
| AA | Excellent solvency |
| A | Strong solvency, but slightly vulnerable to economic conditions |
| BBB | Adequate solvency, but more vulnerable to adverse economic changes |
| BB | Speculative: Solvency less vulnerable in the short term, but associated with considerable uncertainty in the long term |
| B | Speculative: Currently solvent, but more susceptible to unfavourable situations |
| CCC | Speculative: solvency currently vulnerable and dependent on conditions |
| CC | Speculative and highly risky: default has not yet occurred, but is almost certainly expected. |
| C | Speculative and highly risky: currently very susceptible to defaults, and repayment is likely to be lower than expected. |
| D | Speculative and highly risky: there is already a payment default or breach of a financial obligation, and a bankruptcy petition may have been filed. |
The following table provides an overview of potential returns on government bonds, using examples from several countries.
| Country | Yield on government bonds (in per cent) |
| USA | 1,62 |
| Greece | 0,9 |
| Italy | 0,75 |
| Spain | 0,39 |
| Irland | 0,09 |
| Belgium | 0,04 |
| Finland | -0,11 |
| Netherlands | -0,13 |
| Germany | -0,28 |
Investing in government bonds – what you need to know
To invest in government bonds, you need a securities account with a bank. Private investors can purchase German government bonds on the secondary market on the stock exchange. The ISIN and securities identification number of the relevant bond can be used for this purpose. You should consider the following points before deciding to invest in government bonds.
Government bonds as a security component in the portfolio
Government bonds are a good choice for investors looking for asset classes to increase the security component of their portfolio. Government bonds fluctuate less than stocks, for example.
Good to know:
This is particularly true in the case of countries with high credit ratings. The risk of default is low for such countries. However, low-risk bonds offer little opportunity for returns due to their high level of security. Government bonds with high credit ratings are therefore only suitable for investors who want to invest part of their assets in a very secure manner.
Different currencies
Despite the general security of government bonds, there is another potential risk: currency risk. This can arise when an investor purchases government bonds in a foreign currency. There are numerous reasons that can lead to significant fluctuations in exchange rates.
Possible reasons for this include economic or political crises in the respective country. This can lead to a sharp decline in the value of the national currency. Investors could then receive less than the nominal value of the bond on the maturity date of their investment. There is a simple way to avoid currency risk: only buy government bonds denominated in your own currency.
Are there government bond ETFs?
It is possible to invest not only in individual government bonds, but also in bond funds. This allows you to diversify your investments in government bonds and invest in several bonds at the same time. This can reduce the risk.
Such ETFs contain bonds with short and long maturities and bonds from different countries with varying credit ratings. This mix can offset fluctuations and potential losses. Such ETFs are cheaper than actively managed bond funds, some of which charge high fees.
Conclusion: Government bonds in your portfolio as a security component
Government bonds are fixed-interest debt securities that enable investors to lend money to the government. In return, they receive their money back plus interest after a fixed period of time.
When purchasing government bonds, the credit rating of the respective country should be taken into account. Countries with good credit ratings have only a low risk, and defaults are rare. Countries with poor credit ratings offer higher potential returns, but the risks are also higher.
Government bonds are suitable for investors looking for a very safe investment to offset risky investments such as stocks. Government bond ETFs could also be purchased for this purpose, promoting further diversification.
FAQ – Frequently asked questions about government bonds
