Investing with government bonds

Government bonds are debt securities issued by states or state institutions with different maturities. With government bonds, states can obtain debt capital to finance their own budget or special assets.

The investor as creditor

While shareholders become co-owners of the company by buying shares, buyers of government bonds fulfil a different role. They are creditors of states to which they lend money.

In return, states or state institutions undertake to pay the creditors the nominal value of the bond at the end of the term and to distribute interest on a regular basis.

Types of government bonds

Various forms of government bonds are issued in Europe. Their issuance is managed and coordinated by the Finance Agency.

1.     Federal bonds: These bonds have the longest maturity at ten or 30 years. These bonds are used for long-term financing of the budget.
2.     Federal bonds: This form of bond is issued with a term of five years. Federal bonds are used by the state for medium-term financing of projects.
3.     Federal Treasury notes: With a maturity of two years, they are predestined for short-term financing of states or state institutions and municipalities.

In the USA there are also three different forms of government bond: T-bills, T-notes and T-bonds. In Switzerland, they are called government bonds. In Great Britain, the designation is "Gilts".

The role of the European Central Bank (ECB)

Since the great debt crisis in Europe, the ECB has increasingly been buying up government bonds of crisis-ridden states. In this way, the states are secured in the event of a payment obligation after maturity.

In this way, the ECB also prevents financially weak countries from running into liquidity bottlenecks because no one wants to buy the government bonds. Because the disadvantage of financially weaker states is that they promise high interest rates, but because of their poor credit rating no one expects a secure payment at maturity. The money that the traders invests in buying bonds with https://forex-exness.net/downloadexness/ comes from fresh money that it puts into circulation.

The role of the rating agencies

So-called "rating agencies" are responsible for assessing creditworthiness. They use complicated procedures to determine how creditworthy a country is. In the European Union, rating agencies need the appropriate authorisation to become active. Worldwide, there are various rating agencies that are always under discussion. Among the best known are:

•     Fitch Ratings
•     Japan Credit Rating Agency Ltd.
•     Scope Ratings
•     Moodys
•     Creditreform
•     GBB Rating

Time and again, however, there is criticism of the work of individual rating agencies. In some cases they are accused of partiality. Their work usually gives them a great deal of power. For example, it has significant consequences if a sovereign's credit rating slips from AAA to BBB.
Rating downgrades

The creditworthiness of sovereigns can be graded with letters from A to C. AAA (triple A) is the best rating. Only a few sovereigns have such a credit rating. The worst rating is a CCC-. These are, for example, government bonds with a very high risk of default.