A bond is a loan an investor makes to an organization in exchange for regular interest payments over a specific period of time. At the end of that period, known as its maturity date, the loan is repaid in full. A key differentiator as to whether a bond investment is safe or risky depends on to whom the loan is made.
Treasuries are considered the safest bonds available because they are backed by the “full faith and credit” of the U.S. government. They are quite liquid because certain primary dealers are required to buy Treasuries in large quantities when they are initially sold and then trade them on the secondary market. Treasuries also are more affordable than other types of bonds; you can buy one for as little as $100. Investors can purchase Treasuries through brokerage firms, banks or the Treasury Direct website.
A treasury bond with a maturity of one year or less is called a Treasury bill, or T-bill. A maturity between two and 10 years is a Treasury note, or T-note. The term Treasury bond generally refers to long-term maturities of 10 to 30 years from their issue date.
Other types of government bonds include those issued or guaranteed by U.S. federal government agencies and those issued by government-sponsored enterprises, which are corporations created by Congress for public use. GSEs include the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage (Freddie Mac) and the Federal Agricultural Mortgage Corp. (Farmer Mac). Agency bonds are backed by the U.S. government, but GSE bonds do not enjoy quite the same guarantee and therefore pose greater credit risk.
Next on the bond risk spectrum are municipal bonds (muni bonds), which are issued and guaranteed by individual states, cities, counties and other government entities. These bonds use loan funds to build roads, schools and other public projects. The guarantee for muni bonds is made by the issuer, so while they are relatively secure because they come from government issuers, their level of risk varies depending on the financial stability of the backing agency.
Next on the risk spectrum are corporate bonds, which are issued by all types of companies in order to raise money for capital expenditures, operations and acquisitions. They work just like government bonds and, should the issuer claim bankruptcy before the principal is repaid, bondholders are positioned toward the front of the line for at least a partial repayment. Corporate bonds are generally categorized as either investment grade or non-investment grade, which refers to how risky they are. Investment grade bonds are generally lower risk, but non-investment grade bonds – also referred to as high yield or junk bonds – tend to pay out higher interest to compensate for that risk.
While global diversification can be a good risk mitigation strategy for some investors, international bonds are considered more risky than domestic bonds, and emerging markets bonds are considered the most risky. Because these bonds are issued by foreign governments and companies, the risk varies by issuer and is impacted by political, cultural, environmental and economic factors. Furthermore, foreign bonds expose investors to currency risk, which means the value of payments can fluctuate once funds are converted to U.S. dollars.
FAQs
Treasuries are considered the safest bonds available because they are backed by the “full faith and credit” of the U.S. government. They are quite liquid because certain primary dealers are required to buy Treasuries in large quantities when they are initially sold and then trade them on the secondary market.
What type of bond is the safest? ›
Treasurys are generally considered "risk-free" since the federal government guarantees them and has never (yet) defaulted. These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods.
Which bond is considered to be the safest? ›
Treasury bonds (also known as T-bonds) are issued by the U.S. Department of the Treasury to finance the national debt and other government expenditures. They are considered to be among the safest investments in the world because they are backed by the full faith and credit of the U.S. government.
Which of the following is the safest bond rating? ›
Moody's Investors Service Bond Ratings
| Rating | Description |
|---|
| Aaa | Obligations of the highest quality, with minimal risk. |
| Aa | Obligations of high quality, with very low credit risk. |
| A | Obligations of upper-medium-grade, with low credit risk. |
| Baa | Obligations of moderate credit risk that may possess speculative characteristics. |
5 more rowsU.S. Treasuries
These are considered the safest possible bond investments. You'll have to pay federal income tax on interest from these bonds, but the interest is generally exempt from state tax. Because they're so safe, yields are generally the lowest available, and payments may not keep pace with inflation.
What is the most trustworthy bond? ›
10-year Treasury note
U.S. Treasury bonds are considered the safest in the world and are generally called "risk-free." The 10-year rate is considered a benchmark and is used to determine other interest rates, such as mortgage rates, auto loans, student loans, and credit cards.
What are the best treasury bonds to buy now? ›
7 Best Treasury ETFs to Buy Now
| ETF | Expense ratio | Yield to maturity |
|---|
| iShares U.S. Treasury Bond ETF (GOVT) | 0.05% | 3.9% |
| Global X 1-3 Month T-Bill ETF (CLIP) | 0.07% | 5.2% |
| Vanguard Short-Term Treasury ETF (VGSH) | 0.04% | 4.8% |
| Vanguard Intermediate-Term Treasury ETF (VGIT) | 0.04% | 4.4% |
3 more rowsAug 14, 2024
GOVERNMENT BONDS
Intermediate-term bonds mature in three to 10 years, whereas long-term bonds generally mature in 10 to 30 years. Risk Considerations: Among the lowest risk of all bond investments, these bonds have low credit risk because they are backed by the full faith and credit of the U.S. government.
What is the most risk free bond? ›
U.S. Treasury bonds (T-bonds) are often touted as risk-free investments. And it's true.
What is safer Treasury bills or bonds? ›
Treasury bills function more like cash in your portfolio and can be a safe harbor during turbulent economic times. Treasury bonds can provide a dependable stream of income, but can suffer a loss of value on secondary markets if interest rates go up.
High-yield corporate bonds
High-yield corporates are issued by companies with credit ratings of Ba1 or BB+ or below by Moody's and S&P, respectively, and therefore have a relatively higher risk of default.
What type of bond rating is the best? ›
Either way, bond ratings are scaled differently depending on the rating agency, and it's important to know the similarities and differences across rating firms. For Standard & Poor's, AAA is the best rating, followed by AA, A, BBB, BB, B, CCC, CC, and C.
Which bond is more secure? ›
Government secured bonds are considered very safe investments because they are backed by some specific collateral. However, since they pay lower interest rates, they are mostly favoured by investors who want to protect their capital rather than grow wealth.
Can you lose money on bonds if held to maturity? ›
TAKEAWAYS: Not losing money by holding a bond until maturity is an illusion. The economic impact of market rate changes still impacts investors holding bonds until maturity. A bond index fund provides an investor with greater diversification and less risk.
Which type of bond is considered to be the safest? ›
Treasuries are considered the safest bonds available because they are backed by the “full faith and credit” of the U.S. government.
Which type of bond is historically the safest? ›
Financial analysts widely recognize municipal bonds as some of the most historically low risk investments for principal protection. Leading experts, in various comprehensive studies on municipal bonds, highlight their consistent performance, even amid economic challenges.
What type of bond has the lowest risk? ›
Risk Considerations: Agency and entity bonds are widely seen as having low credit risk due to their association with government-chartered entities.
What is the riskiest type of bond? ›
High-yield or junk bonds typically carry the highest risk among all types of bonds. These bonds are issued by companies or entities with lower credit ratings or creditworthiness, making them more prone to default.
What are the lowest risk bonds? ›
A Series I savings bond is a low-risk bond that adjusts for inflation, helping protect your investment. When inflation rises, the bond's interest rate is adjusted upward. But when inflation falls, the bond's payment falls as well.
