How to Buy Government Bonds: A Complete Guide to Safe Investing

With interest rates at their highest levels since before the global financial crisis, it’s no surprise that more and more people are interested in investing in government bonds. Data shows that millions of people now see government bonds as an attractive investment option. Before you decide to buy government bonds, it’s important to understand how they work, their benefits and risks, and practical steps to get started.

Types of Government Bonds and Their Differences

There are three main types of government bonds you should know about:

• Treasury Bonds: These are long-term investments with periods of 20 to 30 years. They pay fixed interest every six months until maturity, and the interest rate remains unchanged during the bond’s term.

• Treasury Bills: For investors with shorter time horizons, Treasury bills are an attractive alternative. These have maturities of 4, 8, 13, 17, 26, or 52 weeks. Bills are sold at a discount or at face value, and at maturity, you receive the full face value.

• Treasury Notes: These are intermediate positions for those wanting to invest longer than bills but shorter than bonds. Notes have maturities of 2 to 10 years and pay fixed interest every six months.

Why Investing in Government Bonds Is Very Profitable

There are several significant advantages when you choose to buy government bonds:

Your Money Is Safely Protected

When investing in government bonds, you gain protections not available with other investment instruments. These bonds are fully backed by the trust and credit of the government. Since the government has never defaulted on its obligations before, the risk of default is much lower compared to corporate or municipal bonds, which carry higher credit risks. While there are no absolute guarantees, your money is likely much safer in government bonds than in almost any other investment options.

Attractive Returns

For those seeking a useful way to grow their money with low risk, government bond interest rates offer a competitive alternative. Based on historical data, the average annual return on savings accounts is only 0.42%, while 12-month certificates of deposit average 1.6%. In contrast, government bond interest rates can reach 3.875% or higher, helping your money grow faster.

Exempt from Local and State Taxes

With government bonds, you must pay national income tax annually on the interest earned. However, this interest is usually exempt from local or state taxes. Of course, this benefit can be a disadvantage depending on your local tax rates. Bond interest is taxed at your regular income tax rate, which can be as high as 35%. Compare this with other investment options that are taxed upon sale at capital gains rates, which max out at 20% for investments held at least one year.

Risks to Know Before Buying Government Bonds

Although government bonds are a safe investment choice, there are some risks to consider:

Interest Rate Risk

Interest rate risk is common to all bonds, especially fixed-rate bonds like government bonds. Bonds generally have an inverse relationship with interest rates—when rates rise, the value of fixed-rate bonds falls, and vice versa. For example, if you hold a bond with a 3% interest rate and market rates rise to 4% or more, your bond will be worth less if you try to sell it on the secondary market. If you need to sell bonds before maturity, you could incur losses.

Inflation Erodes Investment Value

Rising inflation is another risk factor to consider. Higher inflation can diminish the value of the interest generated by bonds and reduce your total returns. While your principal is “safe,” you are actively losing purchasing power due to inflation.

Opportunity Cost

Government bonds can be a good choice for investors seeking a useful way to grow their money with moderate risk. However, for long-term investors, there may be better options. Historically, the stock market has yielded annual returns of about 10% (around 6-7% after adjusting for inflation). Investing in index funds might help you achieve higher returns over time.

Two Easy Ways to Buy Government Bonds

There are two main ways to purchase government bonds: directly from the government and through a broker.

Buying Government Bonds Directly from the Government

You can buy government bonds directly from the government by visiting the official TreasuryDirect website. The minimum purchase amount is $100, and you need a Social Security number or taxpayer identification number. Visit the site and create a TreasuryDirect account. The site will ask for your personal information, banking details, and you will need to create a username and password.

Although the interface looks dated, this is an official and secure platform. When sharing sensitive information with a government agency, always ensure you are visiting a “.gov” website. After creating your account, you can buy government bonds through the site and specify the amount you want to invest. With government bonds, you can purchase in multiples of $100.

Buying Government Bonds Through a Broker

Many mutual funds and exchange-traded funds (ETFs) invest in government bonds. By investing in these funds through a broker, you can gain exposure to a variety of securities with a single investment. To buy bond funds, you need a brokerage account and must make an initial deposit to fund your account. Once your account is set up, you can log into the trading platform and enter the name of the fund you want to invest in along with the number of shares you wish to buy.

Conclusion and Next Steps

Buying government bonds can be a smart investment decision to complement your overall portfolio, providing stability and fixed interest for 20 to 30 years. However, if you are investing for long-term goals like retirement, government bonds should serve as a supplement to your other investments rather than your main focus.

If you’re unsure how to invest your money or what role bonds and stocks should play in your portfolio, consult a financial advisor to develop a personalized investment plan tailored to your needs and financial goals.