{{short description|Bond issued by a government}} {{Redirect|Government investment|investment by governments|Government spending}}
thumb|U.S. government bond: 1976 8% Treasury Note|upright=1.2 A '''government bond''' or '''sovereign bond''' is a form of bond issued by a government to support public spending.<ref>{{cite web |title=Bonds and Yields |url=https://www.imf.org/en/Publications/fandd/issues/2025/03/back-to-basics-bonds-and-yields-s-ali-abbas |website=IMF |access-date=29 August 2025 |language=en}}</ref> It generally includes a commitment to pay periodic interest, called coupon payments'','' and to repay the face value on the maturity date.<ref>{{cite web |title=Bonds |url=https://corporatefinanceinstitute.com/resources/fixed-income/bonds/ |website=Corporate Finance Institute |access-date=29 August 2025}}</ref> The ratio of the annual interest payment to the current market price of the bond is called the current yield. The yield tends to decrease when the government budget balance improves.<ref name="l377">{{cite journal | last1=Ciżkowicz | first1=Piotr | last2=Ledóchowski | first2=Michał | last3=Rzońca | first3=Andrzej | title=Fiscal policy and government bond yields: New evidence from the EU | journal=Economic Modelling | volume=147 | date=2025 | doi=10.1016/j.econmod.2025.107054 | article-number=107054 | url=https://linkinghub.elsevier.com/retrieve/pii/S0264999325000495 | access-date=2026-05-19| url-access=subscription }}</ref>
For example, a bondholder invests $20,000, called face value or principal, into a ten-year government bond with a 10% annual coupon; the government would pay the bondholder 10% interest ($2000 in this case) each year and repay the $20,000 original face value at the date of maturity (i.e. after ten years).
Government bonds can be denominated in a foreign currency or the government's domestic currency.<ref name="ECB foreign currency bonds overview">{{cite web |title=An overview of trends in bond market issuance denominated in foreign currency |url=https://www.ecb.europa.eu/pub/pdf/ire/article/ecb.ireart201407_03~4f1cfe9386.en.pdf |website=European Central Bank |access-date=29 August 2025}}</ref> Countries with less stable economies tend to denominate their bonds in the currency of a country with a more stable economy (i.e. a hard currency).<ref name="ECB foreign currency bonds overview" /> International credit rating agencies provide ratings for each country's bonds.<ref>{{cite journal |last1=Amstad |first1=Marlene |last2=Packer |first2=Frank |title=Sovereign ratings of advanced and emerging economies after the crisis |journal=BIS Quarterly Review |date=6 December 2015 |url=https://www.bis.org/publ/qtrpdf/r_qt1512h.htm |access-date=29 August 2025 |language=en}}</ref> Bondholders generally demand higher yields from riskier bonds; for example, during the Greek government-debt crisis, the spread (difference) in yields between two and ten-year Greek and German government bonds peaked at 26,000 and 4000 basis points, respectively.<ref>{{cite journal |last1=Gibson |first1=Heather D. |last2=Hall |first2=Stephen G. |last3=Tavlas |first3=George S. |title=Fundamentally Wrong: Market Pricing of Sovereigns and the Greek Financial Crisis |journal=Journal of Macroeconomics |date=March 2014 |volume=39 |pages=405–419 |doi=10.1016/j.jmacro.2013.08.006}}</ref> Governments close to a default are sometimes referred to as being in a sovereign debt crisis.<ref>{{Cite web |url=http://www.businessdictionary.com/definition/sovereign-debt.html |title=What is Sovereign Debt |access-date=2014-08-02 |archive-date=2020-07-02 |archive-url=https://web.archive.org/web/20200702202344/http://www.businessdictionary.com/definition/sovereign-debt.html }}</ref><ref>{{Cite web |url=http://www.macauhub.com.mo/en/2014/07/01/portugal%e2%80%99s-sovereign-debt-totals-132-9-pct-of-gdp-at-the-end-of-1st-quarter/ |title=Portugal sovereign debt crisis |archive-url=https://web.archive.org/web/20140810002458/http://www.macauhub.com.mo/en/2014/07/01/portugal%e2%80%99s-sovereign-debt-totals-132-9-pct-of-gdp-at-the-end-of-1st-quarter/ |archive-date=2014-08-10 |access-date=2014-08-02}}</ref>
==History== {{Financial markets}}
One of the first assets resembling government bonds were the forced loans, or ''prestiti'', that the Republic of Venice first issued in 1172 to fund wars and defence spending.<ref>{{cite web |title=The Death of Liquidity |url=https://www.morningstar.com/portfolios/death-liquidity |website=Morningstar, Inc. |access-date=30 August 2025 |language=en |date=16 May 2019}}</ref> These paid a nominal interest rate of 5% per year on the face value, in two half-yearly instalments, and could be sold in the open market for a lump sum.<ref>{{cite journal |last1=Lewin |first1=C. G. |title=The emergence of compound interest |journal=British Actuarial Journal |date=2019 |volume=24 |doi=10.1017/S1357321719000254 |url=https://www.cambridge.org/core/journals/british-actuarial-journal/article/emergence-of-compound-interest/799CB1D40CDD46F3010767BFC60F24DB |access-date=30 August 2025|doi-access=free }}</ref>
In 1694, William III of England used a syndicate of 1268 investors to purchase debt to fund the Nine Years' War.<ref name="BoE_History">{{cite book |url=https://www.bankofengland.co.uk/-/media/boe/files/archive/publications/history-and-functions.pdf |title=The Bank of England: History And Functions |publisher=The Bank of England Archive |year=1970 |location=Debden Loughton Essex |pages=3–4 |id=G15/634 |access-date=August 30, 2025}}</ref><ref>{{cite web |title=Index to Original Subscribers to Bank Stock 1694 |url=https://www.bankofengland.co.uk/archive/index-to-original-subscribers-to-bank-stock-1694 |website=www.bankofengland.co.uk |access-date=30 August 2025 |language=en}}</ref> This syndicate was granted a Royal charter, becoming the Bank of England.<ref name="BoE_History" /> Much of the initial debt issuance by the English government took an unconventional form by current standards, including annuities and lotteries as parts of their design, but alongside these were a number of perpetual bonds offering different coupon rates, and by 1752 these perpetual bonds were consolidated (consols) in a smaller number of distinct stocks offering fixed coupon payments, and the bond market took a more recognisably modern form.<ref>{{cite web |last1=Ellison |first1=Martin |last2=Andrew |first2=Scott |title=Managing the UK National Debt 1694-2017 |url=https://www.lse.ac.uk/CFM/assets/pdf/CFM-Discussion-Papers-2017/CFMDP2017-27-Paper.pdf |website=London School of Economics and Political Science |publisher=LSE |access-date=30 August 2025 |date=2017}}</ref>
In the United States of America, bonds date back to the American Revolution, where private citizens purchased US$27 million of government bonds to help finance the war.<ref>{{cite web |title=A History of the United States Savings Bonds Program |url=https://www.treasurydirect.gov/files/research-center/history-of-savings-bond/history-sb.pdf |website=treasurydirect.gov |publisher=US Treasury |access-date=30 August 2025}}</ref><ref>{{cite web |title=Fiscal Data Explains U.S. Treasury Savings Bonds |url=https://fiscaldata.treasury.gov/treasury-savings-bonds/ |website=fiscaldata.treasury.gov |access-date=30 August 2025 |language=en}}</ref> Today, the market for US government bonds (known as US Treasury securities) is the largest and most liquid market for government securities in the world,<ref>{{cite web |last1=Grothe |first1=Magdalena |last2=Manu |first2=Ana-Simona |last3=McQuade |first3=Peter |title=US Treasury market conditions and global market reactions to US monetary policy |url=https://www.ecb.europa.eu/press/economic-bulletin/focus/2024/html/ecb.ebbox202308_01~352236489b.en.html |access-date=30 August 2025 |language=en |date=11 January 2024}}</ref> averaging $900bn in transactions per day.<ref>{{cite web |last1=Liang |first1=Nellie |title=What's going on in the US Treasury market, and why does it matter? |url=https://www.brookings.edu/articles/whats-going-on-in-the-us-treasury-market-and-why-does-it-matter/ |website=Brookings}}</ref>
==Risks==
===Credit risk=== A government bond in a country's own currency is strictly speaking a risk-free bond, because the government can if necessary create additional currency in order to redeem the bond at maturity.<ref>{{cite journal |last1=Krugman |first1=Paul |title=Currency Regimes, Capital Flows, and Crises |journal=IMF Economic Review |date=1 November 2014 |volume=62 |issue=4 |pages=470–493 |doi=10.1057/imfer.2014.9}}</ref> There have been instances where a government has chosen to default on its domestic currency debt rather than create additional currency, such as Russia in 1998 (the "ruble crisis").<ref>{{cite journal |last1=Kharas |first1=Homi J. |last2=Pinto |first2=Brian |last3=Ulatov |first3=Sergei |title=An Analysis of Russia's 1998 Meltdown: Fundamentals and Market Signals |journal=Brookings Papers on Economic Activity |date=2001 |volume=2001 |issue=1 |pages=1–68 |doi=10.1353/eca.2001.0012 |url=https://www.brookings.edu/articles/an-analysis-of-russias-1998-meltdown-fundamentals-and-market-signals/}}</ref> Furthermore, if a government bond is issued in a foreign currency then the government cannot simply create additional currency to redeem the bond, but must instead use its foreign currency reserves.<ref name="ECB foreign currency bonds overview" />
Investors may use rating agencies to assess credit risk. In the United States, the Securities and Exchange Commission (SEC) has designated ten rating agencies as nationally recognized statistical rating organizations.<ref>{{cite web |title=urrent NRSROs |url=https://www.sec.gov/about/divisions-offices/office-credit-ratings/current-nrsros |website=www.sec.gov |access-date=24 August 2025}}</ref>
===Currency risk=== In general, currency risk (or foreign exchange risk) refers to the exposure to exchange rate fluctuations faced by investors when purchasing assets priced in a different currency.<ref>{{cite web |title=Currency Risk |url=https://corporatefinanceinstitute.com/resources/foreign-exchange/currency-risk/ |website=Corporate Finance Institute |access-date=24 August 2025}}</ref> For example, a German investor would consider United States bonds to have more currency risk than German bonds (since the dollar may go down relative to the euro); similarly, a United States investor would consider German bonds to have more currency risk than United States bonds (since the euro may go down relative to the dollar). A bond paying in a currency that does not have a history of keeping its value may not be a good deal even if a high interest rate is offered.<ref>{{Cite news |url=https://www.reuters.com/article/us-emerging-currencies-analysis-idUSBRE9AL0O120131122 |title=Analysis: Counting the cost of currency risk in emerging bond markets |date=22 November 2013 |work=Reuters |access-date=2 July 2017 |archive-date=7 March 2016 |archive-url=https://web.archive.org/web/20160307093457/http://www.reuters.com/article/us-emerging-currencies-analysis-idUSBRE9AL0O120131122 |url-status=live }}</ref>
===Inflation risk===
Inflation risk is the risk that changes in the ''real'' rate of return (i.e. after adjusting for inflation) realized by an investor will be negative.<ref>{{cite web |title=Inflation risk Definition |url=https://www.nasdaq.com/glossary/i/inflation-risk |website=www.nasdaq.com |access-date=26 August 2025 |language=en}}</ref> Inflation is defined as an increase in average price levels, and thus causes a reduction in the purchasing power of money.<ref>{{cite web |title=Inflation: Prices on the Rise |url=https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Inflation |website=IMF |access-date=26 August 2025 |language=en}}</ref> A bond issued at a fixed interest rate is therefore susceptible to inflation risk (for example, if a bond is purchased at an interest rate of 5%, but the rate of inflation is 4.5%, then the real rate of return is only 0.5%).<ref>{{cite web |title=How does Inflation affect bonds? |url=https://www.mandg.com/investments/private-investor/en-gb/in-the-spotlight/m-g-insights/2023/08/how-does-inflation-affect-bonds |website=www.mandg.com |access-date=26 August 2025 |language=en}}</ref> Many governments issue inflation-indexed bonds, which protect investors against inflation risk by linking both interest payments and maturity payments to a consumer price index. See, for example, US Treasury Inflation-Protected Securities (TIPS).<ref name="TIPS">{{cite web |title=TIPS — TreasuryDirect |url=https://treasurydirect.gov/marketable-securities/tips/ |website=treasurydirect.gov |access-date=26 August 2025}}</ref>
===Interest rate risk=== Interest rate risk is defined as the risk that a bond or other fixed-income asset to declines due to fluctuations in interest rates.<ref>{{cite web |title=Interest Rate Risk |url=https://corporatefinanceinstitute.com/resources/career-map/sell-side/risk-management/interest-rate-risk/ |website=Corporate Finance Institute |access-date=29 August 2025}}</ref> Interest rates and bond prices have an inverse relationship, so bond prices fall when interest rates rise.<ref>{{cite web |title=Interest rate risk — When Interest rates Go up, Prices of Fixed-rate Bonds Fall |url=https://www.sec.gov/files/ib_interestraterisk.pdf |website=US Securities and Exchange Commission |access-date=29 August 2025}}</ref> For example, suppose an investor purchases a ten-year $1000 bond paying a 3% coupon. If a year later interest rates rise to 4%, then although the bond purchased by the investor still pays a 3% coupon, a $1000 bond issued after the interest rate rise will pay out a 4% coupon, making the original bond less attractive to other investors, unless sold at a discount.<ref>{{cite web |last1=Dore |first1=Kate |title=Here's how rising interest rates may affect your bond portfolio in retirement |url=https://www.cnbc.com/2022/01/19/heres-how-rising-interest-rates-may-affect-your-bond-portfolio-.html |website=CNBC |access-date=29 August 2025 |language=en |date=19 January 2022}}</ref>
==United Kingdom== In the UK, government bonds are called gilts. Older issues have names such as "Treasury Stock" and newer issues are called "Treasury Gilt".<ref>{{Cite web|url=https://www.dmo.gov.uk/data/treasury-bills/prices-and-yields/|title=Daily Prices and Yields|work=UK Debt Management Office|access-date=19 August 2020|archive-date=20 September 2020|archive-url=https://web.archive.org/web/20200920035528/https://dmo.gov.uk/data/treasury-bills/prices-and-yields/|url-status=live}}</ref><ref>{{Cite web |url=http://www.dmo.gov.uk/index.aspx?page=Gilts/About_Gilts |title=Gilt Market: About gilts |publisher=UK Debt Management Office |archive-url=https://web.archive.org/web/20161110155438/http://dmo.gov.uk/index.aspx?page=gilts%2Fabout_gilts |archive-date=2016-11-10 |access-date=2011-06-13}}</ref> There are two main types of gilt: ''conventional'', which have a fixed interest rate and length (maturity) and ''index-linked'', whose interest rate and overall loan amount (principal) are automatically adjusted for inflation.<ref>{{cite web |last1=Harari |first1=Daniel |title=What are gilts? A simple guide |url=https://commonslibrary.parliament.uk/what-are-gilts-a-simple-guide/ |website=House of Commons Library |access-date=23 August 2025 |date=18 December 2024}}</ref> The issuance of gilts is managed by the UK Debt Management Office, an executive agency of HM Treasury. Prior to April 1998, gilts were issued by the Bank of England.<ref>{{Cite web |date=17 May 2022 |title=Gilt Market |url=https://dmo.gov.uk/responsibilities/gilt-market/ |publisher=UK Debt Management Office |url-status=live |access-date=16 May 2022 |archive-date=18 June 2022 |archive-url=https://web.archive.org/web/20220618215202/https://dmo.gov.uk/responsibilities/gilt-market/ }}</ref> Purchase and sales services are managed by Computershare.<ref>{{Cite news |date=16 July 2004 |title=Computershare to take over from Bank of England as UK gilts registrar |work=Thomson Reuters Practical Law |url=https://uk.practicallaw.thomsonreuters.com/0-102-8772?transitionType=Default&contextData=(sc.Default)&firstPage=true |access-date=17 May 2022 |archive-date=1 July 2023 |archive-url=https://web.archive.org/web/20230701094412/https://uk.practicallaw.thomsonreuters.com/0-102-8772?transitionType=Default&contextData=(sc.Default)&firstPage=true |url-status=live }}</ref>
UK gilts have maturities stretching much further into the future than other European government bonds, which has influenced the development of pension and life insurance markets in the respective countries.
A conventional UK gilt might look like this – "Treasury stock 3% 2020".<ref>{{Cite web|last=Kaveh|first=Kim|date=2016-08-02|title=Gilts and corporate bonds explained|url=https://www.which.co.uk/money/investing/how-investing-works/asset-classes-explained/gilts-and-corporate-bonds-explained-a7s643q0n4qy|access-date=2022-02-07|website=Which? Money|language=en|archive-date=2022-02-07|archive-url=https://web.archive.org/web/20220207015244/https://www.which.co.uk/money/investing/how-investing-works/asset-classes-explained/gilts-and-corporate-bonds-explained-a7s643q0n4qy|url-status=live}}</ref> On 3 July 2025 the yield on UK ten-year government bonds was 4.45%<ref>{{cite news |last1=Hoggan |first1=Karen |title=UK borrowing costs fall as investors' nerves ease |url=https://www.bbc.co.uk/news/articles/ce3nj7yw2wvo |access-date=1 September 2025 |work=BBC News |agency=BBC |date=3 July 2025}}</ref> and the official Bank of England Bank Rate was 4.25%.<ref>{{cite web |title=Bank Rate history and data |url=https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp |website=www.bankofengland.co.uk |access-date=1 September 2025}}</ref> As of January 2025, the Standard and Poors credit rating for the UK was AA, with a 'stable' outlook.<ref>{{cite news |title=S&P calls UK borrowing cost jump a "concern", but no immediate hit to rating |url=https://www.reuters.com/world/uk/sp-calls-uk-borrowing-cost-jump-concern-no-immediate-hit-rating-2025-01-17/ |access-date=1 September 2025 |agency=Reuters |date=17 January 2025}}</ref>
== United States == US government bonds are known as United States Treasury securities. They are issued by the United States Department of the Treasury, and the US public debt is managed by the Bureau of the Fiscal Service.<ref>{{cite web |title=Bonds and Securities |url=https://home.treasury.gov/services/bonds-and-securities |website=U.S. Department of the Treasury |access-date=31 August 2025 |language=en |date=8 February 2025}}</ref>
The US Treasury offers both marketable and non-marketable bonds; the former can be sold in secondary markets before the bond reaches maturity, while the latter is registered to the buyers' social security numbers and cannot be transferred.<ref>{{cite web |title=About Treasury Marketable Securities — TreasuryDirect |url=https://treasurydirect.gov/marketable-securities/ |website=treasurydirect.gov}}</ref> The US Treasury offers five kinds of marketable securities:<ref name="TreasuryDirect history of marketable securities">{{cite web |title=History of Treasury Marketable Securities Products and Programs — TreasuryDirect |url=https://www.treasurydirect.gov/research-center/history-of-marketable-securities/ |website=www.treasurydirect.gov}}</ref> # Treasury bills: zero-coupon bonds that mature in one year or less. They are bought at a discount of the par value and, instead of paying a coupon interest, are eventually redeemed at that par value to create a positive yield to maturity.<ref>{{cite web |title=Treasury Bills — TreasuryDirect |url=https://treasurydirect.gov/marketable-securities/treasury-bills/ |website=treasurydirect.gov}}</ref> # Treasury notes: maturity of these bonds is two, three, five or ten years, they provided fixed coupon payments every six months and are sold in increments of $100.<ref>{{cite web |title=Treasury Notes — TreasuryDirect |url=https://treasurydirect.gov/marketable-securities/treasury-notes/ |website=treasurydirect.gov}}</ref> # Treasury bonds (T-bonds or long bonds): treasury bonds with the longest maturity, from twenty years to thirty years. They also have a coupon payment every six months.<ref>{{cite web |title=Treasury Bonds — TreasuryDirect |url=https://treasurydirect.gov/marketable-securities/treasury-bonds/ |website=treasurydirect.gov}}</ref> # Treasury Inflation-Protected Securities (TIPS): an inflation-indexed bond. The principal of these bonds is adjusted to the Consumer Price Index. In other words, the principal increases with inflation and decreases with deflation.<ref name="TIPS"/> # Floating rate notes: two-year bonds with an interest rate that can change (float) over time, and pay interest four times per year.<ref>{{cite web |title=Floating Rate Notes — TreasuryDirect |url=https://treasurydirect.gov/marketable-securities/floating-rate-notes/ |website=treasurydirect.gov}}</ref>
Interest income from Treasury bills, notes and bonds is subject to federal income tax, but exempt from state and local taxes.<ref>{{cite web |title=Examples of taxable interest |url=https://www.irs.gov/taxtopics/tc403 |website=www.irs.gov |access-date=31 August 2025 |language=en}}</ref>
US Treasury Securities are initially sold by the government through an auction process.<ref>{{cite web |title=Auctions In Depth — TreasuryDirect |url=https://www.treasurydirect.gov/research-center/history-of-marketable-securities/auctions/auctions-indepth/ |website=www.treasurydirect.gov |access-date=31 August 2025}}</ref><ref>{{cite web |title=The Treasury Auction Process: Objectives, Structure, and Recent Adaptations - FEDERAL RESERVE BANK of NEW YORK |url=https://www.newyorkfed.org/research/current_issues/ci11-2.html |website=www.newyorkfed.org |access-date=31 August 2025}}</ref> Once issued, marketable securities can then be bought and sold on secondary markets.<ref name="TreasuryDirect history of marketable securities" /> TreasuryDirect is the official website where investors can purchase treasury securities directly from the US Treasury.<ref>{{cite web |title=About — TreasuryDirect |url=https://www.treasurydirect.gov/about/ |website=www.treasurydirect.gov}}</ref>
== See also == {{col div|colwidth=20em}} * Bond market * Foreign-exchange reserves of China * Government debt * Quantitative easing * List of government bonds * Market risk * Municipal bond * Treasury * War Bonds {{col div end}}
== References == {{reflist|20em}}
{{Bond market}} {{Debt}} {{Stock market}}
{{Authority control}}
{{DEFAULTSORT:Government Bond}} Category:Government bonds