What are the safest government bonds to buy?
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. They offer high liquidity due to an active secondary market.
U.S. government bond funds usually invest in Treasury bills, notes and securities issued by government agencies. They are considered the safest in the bond fund category and are ideal for risk-averse investors.
- Fidelity Total Bond ETF FBND.
- iShares Core Total USD Bond Market ETF IUSB.
- iShares Core US Aggregate Bond ETF AGG.
- iShares Total Return Active ETF BRTR.
- Schwab US Aggregate Bond ETF SCHZ.
- SPDR Portfolio Aggregate Bond ETF SPAB.
- Vanguard Tax-Exempt Bond ETF VTEB.
Final answer: U.S. Treasury bonds are the safest in terms of default risk due to the government's financial stability. Start-up technology company bonds pose higher default risk. Investors commonly choose Treasury bonds for low default risk.
While U.S. savings bonds are considered one of the safest investments, bonds issued by individual companies or municipalities may be risky if the issuer runs into financial difficulties.
One main limitation is that these bonds cannot be bought or sold on the secondary market. This means that once you purchase an I Bond, you are committed to holding it until maturity or redeeming it with the Treasury, subject to certain restrictions. Another potential downside is the purchase limit.
Treasury bonds will pay you interest twice a year. 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.
| Bond Issuer | Coupon Rate | Credit Rating |
|---|---|---|
| Rajasthan State Road Transport Corporation | 10.25% | BB+ |
| Rajasthan Rajya Vidyut Prasaran Nigam Ltd | 0% | A |
| Tamil Nadu Generation and Distribution Corporation Limited (Different Bond) | 10% | A |
| West Bengal State Electricity Distribution Company Ltd (Different Bond) | 10.85% | A |
Must I pay tax on what the bond earns? You choose whether to report each year's earnings or wait to report all the earnings when you get the money for the bond. If you use the money for qualified higher education expenses, you may not have to pay tax on the earnings.
The exact amount it is worth after 30 years can depend on the interest rate it was issued with and how that interest has compounded over time. For instance, if you had a $100 Series EE savings bond from the U.S. government, which has a guarantee that it will double in value in 30 years, your bond would be worth $200.
What investment is 100% safe?
Safe assets such as U.S. Treasury securities, high-yield savings accounts, money market funds, and certain types of bonds and annuities offer a lower risk investment option for those prioritizing capital preservation and steady, albeit generally lower, returns.
For example, Treasury bonds are typically issued by the U.S. Department of the Treasury and are considered very low-risk due to the backing of the federal government. Corporate bonds, on the other hand, are issued by companies and often offer higher returns to compensate for the increased risk.
2024 is 'a good time to hold bonds'
They are a good investment in 2024, experts say, for the same reasons they felt like a bad investment in 2022. That year, the Federal Reserve embarked on a dramatic campaign of interest-rate hikes in response to inflation, which reached a 40-year high.
Junk Bonds
Junk bonds are high-yield corporate bonds issued by companies with lower credit ratings. Because of their higher risk of default, they offer higher interest rates, potentially providing returns over 10%. During economic growth periods, the risk of default decreases, making junk bonds particularly attractive.
Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns. By owning a mix of different investments, you're diversifying your portfolio.
| Investment Option | Safety Level | Tax Benefits* |
|---|---|---|
| Public Provident Fund (PPF) | Very High | EEE** |
| Fixed Deposits (FDs) | High | TDS applicable |
| National Savings Certificates (NSC) | Very High | Deduction under Sec 80C |
| Senior Citizens Savings Scheme (SCSS) | Very High | Deduction under Sec 80C |
Buying government bonds is a safe investment and it's highly unlikely that you'll lose money. That said, these low-risk investments aren't known for their high returns and gains can be further diminished by inflation and changing interest rates.
You can get your cash for an EE or I savings bond any time after you have owned it for 1 year. However, the longer you hold the bond, the more it earns for you (for up to 30 years for an EE or I bond). Also, if you cash in the bond in less than 5 years, you lose the last 3 months of interest.
For a risk-averse investor, T-bills offer steady, albeit typically low, returns and are useful for preserving capital and maintaining liquidity. However, their low-risk nature also means they generally provide lower yields than other investments and potentially will not keep pace with inflation over time.
Choosing between a CD and Treasuries depends on how long of a term you want. For terms of one to six months, as well as 10 years, rates are close enough that Treasuries are the better pick. For terms of one to five years, CDs are currently paying more, and it's a large enough difference to give them the edge.
How do you avoid tax on Treasury bonds?
- Report interest each year and pay taxes on it annually.
- Defer reporting interest until you redeem the bonds or give up ownership of the bond and it's reissued or the bond is no longer earning interest because it's matured.
When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.
US Treasuries are often considered the safest bond investment since they are backed by the full faith and credit of the US government. Certificates of Deposit (CDs) are also considered to be relatively safe as current FDIC coverage insures each individual bank up to $250,000 per depositor.
AAA is the highest possible rating that may be assigned to an issuer's bonds by any of the major credit-rating agencies. AAA-rated bonds have a high degree of creditworthiness because their issuers are easily able to meet financial commitments and have the lowest risk of default.
Typical 91-day yields are around 6-7.5%. Needless to say, the higher the yield, the better it is.
