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Investing In Government Bonds

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The Basics of Investing In Government Bonds

Investing In Government BondsInvesting In Government Bonds, in particular United States Treasury Bonds, is a “safe haven” investment that investors have relied on for years to provide steady returns on investment in the form of periodic interest payments by the United States government.  Investing In Government Bonds in the form of United States Treasury Bonds is considered a “safe haven” investment because regardless of the state of the economy, the United States government is viewed as an entity that can be relied upon to make interest payments on their debts.  There are a number of different types of government bonds to consider, from United States Treasury Bonds issued by the federal government to Municipal Bonds, which include bonds issued by local, county, and state governments.

Interest earned from United States Treasury Bonds is not usually taxed on a local or state level, but is subject to federal taxation.  Interest earned from Municipal Bonds is not subject to local, state, or federal taxation, which make municipal bonds appealing to investors looking for a tax haven.

Investing In Government Bonds – The Benefits and Risks

The United States Treasury sells government bonds with a variety of maturity periods, ranging from three months to thirty years.  The interest rate paid to investors holding United States Treasury Bonds is determined during the initial auction of the bonds; the longer the maturity, the higher the interest rate.  For example, the popular 2-year, 10-year, and 30-year United States Treasury Bonds currently provide annual interest rates of 0.35%, 2,80%, and 4.12% respectively.  On a historical basis, the interest rates paid on United States Treasury Bonds are currently very low, and the bonds are selling at elevated levels.  This is due to the 2008 financial crisis and subsequent severe recession and slow economic recovery, which has resulted in an enormous demand for United States Treasury Bonds from investors seeking a safe place to invest their money.  Investors who are interested in Investing In Government Bonds should take this into consideration because when the United States economy returns to a healthy condition, the value of United States Treasury Bonds that are brought at currently elevated levels will likely fall, as demand subsides and investors sell government issued bonds to seek out higher investment returns elsewhere, such as via the stock market.  This would cause a loss of investment principal for investors who invest in government bonds at currently elevated levels.

The 2008 financial crisis had a much different effect on Municipal Bonds than United States Treasury Bonds, which needs to be understood by those considering Investing In Government Bonds.  With local, county, and state governments reeling from the financial crisis, housing market meltdown, and the severe recession that followed, concerns have been raised about the ability of local, county, and state governments to make interest payments on the Municipal Bonds that they have issued, raising the possibility of large scale defaults in Municipal Bonds.  This has caused investors to sell their holdings in Municipal Bonds, which has caused Municipal Bonds to lose 10% to 20% of their value.  Unlike United States Treasury Bonds that are currently overvalued on a historical basis, Municipal Bonds are currently undervalued on a historical basis, which makes them attractive to investors looking to protect their principal investment.  Municipal Bonds are still at risk of widespread defaults, should the United States economy fall back into a recession in the near future.  But if the United States economy recovers, Municipal Bonds could appreciate nicely in price as they pay out tax free interest payments to the holders of the bonds.  For more information about Municipal Bonds, see:  Municipal Bonds Offer a Safe Way to Earn Tax Free Income.

Since 2011 is a year in which a slow economic recovery is occurring after a severe recession, Investing In Government Bonds has a number of risks and opportunities that are not normally present in the government bond market.  However Investing In Government Bonds is still be viewed as one of the safest ways to invest money.

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