Reasons to invest in government bonds
Government bonds are one of the safest assets that you can add to your investment portfolio, but there are other reasons why this asset class should be added to your portfolio.
Consider the top reasons below.
- Safety and stability
Government bonds, especially AGBs, are some of the safest and most stable securities you can add to your portfolio – to date, the Australian government has never defaulted on its bonds.
AGBs are investment grade – and so are many international government bonds – which means experts are confident that the bond issuer is not at risk of defaulting.
- Assured income
Majority of government bonds are fixed-income investments, which means investors can expect to receive interest payments regularly.
This assurance also means government bonds offer more liquidity, and they can easily be traded anytime should you need cash quickly.
Lower riskThe biggest risk in bonds are inflation and interest rates, which are inversely proportional. This means:
When inflation is low, interest rates rise and returns increase, but bond prices decrease.
When inflation goes up, interest rates decline and returns decrease, but bond prices increase.
Inflation may decrease the value of the accumulated income by the time the bond matures, but using different strategies may ensure that the benefits would outweigh the risks.
For instance, the bond laddering strategy requires investment in bonds with different maturities and reinvesting the principal amount and gains in the next maturing bond. This strategy helps mitigate inflation risk while also ensuring that a portion of your money retains liquidity.
Another thing to note is that there are AGBs that can protect against inflation – the face value of exchange-traded Treasury Indexed Bonds are adjusted quarterly based on the consumer price index.
LiquidityGovernment bonds are offered in the primary market as large parcels worth at least $1 million, but AGBs may also be purchased in smaller parcels in the secondary market.
AGBs are listed in the Australian Securities Exchange in the form of CHESS depositary interests (CDIs), and this allows retail investors to gain beneficial ownership of small parcels.
Since smaller parcels allow retail investors to participate in holding AGBs, offering them as CDIs produces a greater demand from investors and increases its liquidity.
Tax benefitsSome AGBs benefit from tax exemptions. However, not all AGBs are created equal, and some tax conditions differ depending on the bond issuer.
For instance, municipal bonds may only receive a tax exemption at the municipal level, while some AGBs may offer a full tax exemption on its earnings.
Explore nestegg to learn more about bonds and other debt securities.