Government Bonds and Securities

The Treasury Department is the primary issuer of U.S. government bonds.

Government bonds are debt securities issued by the federal or foreign governments. State and local governments also issue bonds, but these securities are referred to as municipal bonds. Investors interested in the safety and/or yield of government-issued bonds have a choice of several types of securities.

Treasury Securities

Treasury securities are direct obligations of the U.S. government. The Treasury issues Treasury bills with terms of four to 52 weeks, Treasury notes that mature in two to 10 years and 30-year Treasury bonds. Treasuries are initially sold through an auction held by the Treasury every week. Bills, note and bonds can be bought and sold on the secondary market through a dealer or broker. Interest on Treasury securities is exempt from state and local income taxes.

Agency Securities

Some agencies and companies issue debt securities that have direct or implied federal government backing. The most common form of agency debt is mortgage-backed securities (MBS) issued by Ginnie Mae, Fannie Mae and Freddie Mac. Mortgage securities are slices of a pool of home mortgages, and MBS owners receive monthly payments representing the payment of principal and interest by homeowners. Mortgage securities pay a higher rate of interest than Treasury securities but do not have fixed maturity dates.

Foreign Government Bonds

Other countries also issue bonds to generate money to pay for government operations. Foreign government bonds give investors access to issuers with different levels of credit risk and the corresponding higher or lower yields. Foreign bonds may also allow investors to profit from changes in currency exchange rates. Most international bond funds will hold government debt securities in their portfolios.

Investing in Government Securities

Investors who want government bond exposure have several ways to invest. The direct ownership of government bonds avoids any management fees, and the investor can choose whether to hold a bond until maturity or sell it on the secondary market. Mutual funds provide professional portfolio management and the ability to reinvest interest earnings into more shares, compounding the investment. Exchange-traded funds (ETFs) provide low cost investments in government bonds and the possibility to trade in or out of different types or maturities based on changing bond market conditions.

References

• Investing in Bonds: About Government/Agency Bonds
• The Motley Fool: Going Global with Bonds