Agovernment bond orsovereign bond is a form ofbond issued by agovernment to supportpublic spending.[1] It generally includes a commitment to pay periodicinterest, calledcoupon payments, and to repay the face value on thematurity date.[2] The ratio of the annual interest payment to the current market price of the bond is called thecurrent yield.
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 foreigncurrency or the government's domestic currency.[3] Countries with less stable economies tend to denominate their bonds in the currency of a country with a more stable economy (i.e. ahard currency).[3] Internationalcredit rating agencies provide ratings for each country's bonds.[4] Bondholders generally demand higher yields from riskier bonds; for example, during theGreek government-debt crisis, thespread (difference) in yields between two and ten-year Greek and German government bonds peaked at 26,000 and 4000basis points, respectively.[5]
Governments close to a default are sometimes referred to as being in asovereign debt crisis.[6][7]
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One of the first assets resembling government bonds were the forced loans, orprestiti, that theRepublic of Venice first issued in 1172 to fund wars and defence spending.[8] 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.[9]
In 1694,William III of England used a syndicate of 1268 investors to purchase debt to fund theNine Years' War.[10][11] This syndicate was granted aRoyal charter, becoming theBank of England.[10] 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 ofperpetual 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.[12]
In the United States of America, bonds date back to theAmerican Revolution, where private citizens purchased $27 million of government bonds to help finance the war.[13][14] Today, the market for US government bonds (known asUS Treasury securities) is the largest and most liquid market for government securities in the world,[15] averaging $900bn in transactions per day.[16]
A government bond in a country's own currency is strictly speaking arisk-free bond, because the government can if necessarycreate additional currency in order to redeem the bond atmaturity.[17] There have been instances where a government has chosen todefault on its domestic currency debt rather than create additional currency, such asRussia in 1998 (the"ruble crisis").[18] 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.[3]
Investors may use rating agencies to assess credit risk. In the United States, theSecurities and Exchange Commission (SEC) has designated ten rating agencies asnationally recognized statistical rating organizations.[19]
In general, currency risk (orforeign exchange risk) refers to the exposure to exchange rate fluctuations faced by investors when purchasing assets priced in a different currency.[20] 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.[21]
Inflation risk is the risk that changes in therealrate of return (i.e. after adjusting forinflation) realized by an investor will be negative.[22] Inflation is defined as an increase in average price levels, and thus causes a reduction in thepurchasing power of money.[23] 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%).[24] Many governments issueinflation-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).[25]
Interest rate risk is defined as the risk that a bond or other fixed-income asset to declines due to fluctuations in interest rates.[26]Interest rates and bond prices have an inverse relationship, so bond prices fall when interest rates rise.[27] 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.[28]
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If acentral bank purchases a government security, such as a bond ortreasury bill, it increases themoney supply because a Central Bank injects liquidity (cash) into the economy. Doing this lowers the government bond's yield. On the contrary, when a Central Bank is fighting against inflation then a Central Bank decreases the money supply.
These actions of increasing or decreasing the amount of money in the banking system are calledmonetary policy.
In the UK, government bonds are calledgilts. Older issues have names such as "Treasury Stock" and newer issues are called "Treasury Gilt".[29][30] There are two main types of gilt:coventional, which have a fixed interest rate and length (maturity) andindex-linked, whose interest rate and overall loan amount (principal) are automatically adjusted for inflation.[31] The issuance of gilts is managed by theUK Debt Management Office, an executive agency ofHM Treasury. Prior to April 1998, gilts were issued by theBank of England.[32] Purchase and sales services are managed byComputershare.[33]
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".[34] On 3 July 2025 the yield on UK ten-year government bonds was 4.45%[35] and the official Bank of England Bank Rate was 4.25%.[36] As of January 2025, theStandard and Poors credit rating for the UK was AA, with a 'stable' outlook.[37]
US government bonds are known asUnited States Treasury securities. They are issued by theUnited States Department of the Treasury, and the US public debt is managed by theBureau of the Fiscal Service.[38]
The US Treasury offers both marketable and non-marketable bonds; the former can be sold insecondary markets before the bond reaches maturity, while the latter is registered to the buyers' social security numbers and cannot be transferred.[39] The US Treasury offers five kinds of marketable securities:[40]
Interest income from Treasury bills, notes and bonds is subject to federal income tax, but exempt from state and local taxes.[45]
US Treasury Securities are initially sold by the government through anauction process.[46][47] Once issued, marketable securities can then be bought and sold onsecondary markets.[40]TreasuryDirect is the official website where investors can purchase treasury securities directly from the US Treasury.[48]
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