What are government bonds?

Hello blog readers!

Today my topic is conservative and reliable investment instruments, which exactly include government bonds. I will tell you why it is profitable to buy these bonds despite the rather low coupon yield, I will touch on the topic of the Russian market and a bit of the American one. I will show you how to choose such securities correctly and what components make up income.

I will discuss a little about the impact of economic trends and the pull of interest rates, and I will illustrate why these tools must be used when it is necessary to temporarily “park” capital.

What is it and why are they needed

The government of countries has the right to borrow money in different ways, and raising funds from a wide range of private investors is one of them. It is implemented just by government bonds. In simple terms, government bonds are bonds issued on behalf of the national government or municipal entity of the country. This is how funding is attracted for social, economic, military and other needs.

The emission itself is carried out by an authorized body. In our country, the main issuer is the Ministry of Finance of the Russian Federation, in America this role is assigned to the US Treasury.

What is interesting for a private investor

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For individuals, there are several advantages to investing in such debt securities at once:

  • unconditional reliability;
  • high level of liquidity;
  • acceptable profitability, which is often higher than a deposit in a bank;
  • tax incentives.

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I will discuss each of these benefits separately.

What can you do with these bonds?

The purchase of government bonds allows the investor to receive regular coupon payments at predetermined rates. Along with this, creditors have the opportunity to buy and sell securities at any time on the stock market without losing the accumulated coupon income. By the way, having put money on a deposit, you cannot withdraw it ahead of time and receive the accumulated interest.

Legal regulation

If we talk about the peculiarities of regulating federal loan bonds, then initially the government approves the maximum amount of public debt for the coming year. Further, based on these parameters, it makes a decision on the maximum issue of government securities, including bonds. After that, the Ministry of Finance fixes all the characteristics of upcoming issues:

  • Release date;
  • coupon yield;
  • possible offers, etc.

Types of government bonds in the US and the world

The main types of government bonds in the US are treasury and municipal debt securities.

Treasury bonds

US Treasury bonds are recognized as the most reliable debt instruments in the world with an AAA rating. They have huge liquidity and low yield, involve coupon payments during the circulation period and redemption of the face value at the end of this period.

Municipal

Such debt securities in the US can be issued by various municipalities such as a city, state, county, or even a state highway. As a rule, they are divided into two main types: those with real security and those without it. Each of the municipalities in the US has a rating that allows investors to navigate more mobile when choosing such securities.

savings

Government savings bonds are a type of registered debt securities. They cannot be resold on the secondary market. The owners of such bonds can only be residents of the issuing country: insurance companies, private pension funds, joint-stock investment funds, pension and extra-budgetary state funds, state corporations and management organizations.

Profitability and risks

The most reliable of government bonds, as well as among all instruments on the Russian market, is OFZ.

Yields on these securities will slightly exceed the rates on deposits in large banks.

Municipal bonds are also considered quite reliable instruments, as they are backed by state guarantees. But the yield here can already be an order of magnitude higher, and the rate depends on the rating of the issuer that issued debt bonds.

Liquidity in the market

Federal loan bonds, along with the highest reliability rating, provide the largest liquidity on the Russian stock market.

In many ways, these things are interconnected, since investors often, as they say, park money that is not currently involved in investing in short government securities, thereby ensuring a constant volume of trade.

Other types of government securities have slightly worse liquidity, but almost all bonds traded on the Moscow Exchange can be bought and sold without any problems.

Interest rate

The key interest rate set by the Central Bank plays a huge role for debt instruments. When rates rise, yields on new issues also grow, respectively, when they decrease, coupon yields of bonds also fall.

In the secondary market, the yield is leveled off by varying the value of the body of government bonds with a constant coupon yield.

And bonds with a variable coupon will be reviewed and regular payments.

Pros and cons

I have already indirectly talked about the pluses: this is unconditional reliability, mainly a high level of liquidity, and a tax shield.

The downside of government bonds is that you have to pay for reliability with yield: corporate bonds of Russian companies often have more attractive coupon rates and more regular payments, unlike government bonds, where payments are made mainly once a year.

Sometimes, specific properties of bonds can be considered as advantages and disadvantages, for example, with a proposed offer or not, with a variable or fixed coupon, etc.

How to make money on them

The easiest and most understandable way of income from government bonds is to buy securities and receive coupon payments on them.

However, you can actively trade such debt bonds: buy them back at a lower price during some turmoil or make profitable deals based on the dynamics of the key rate, buying bonds before lowering rates and selling them before they rise.[ /box]

How much can you earn

[box type="orange"]The investor's profit from coupons on federal government bonds is now about 6-8% per annum. Municipal bonds yield on average around 8-11% A long-term downward trend in interest rates can increase this profit, this effect is called “rate pull”.

Is it possible to buy on IIS

Government bonds of any type can be bought on individual investment accounts. In this case, it will also be possible to receive a tax deduction, and the restrictions will be the same as for other instruments.

Where can I see a list of all releases available for purchase?

You can see the current list of bonds through special interactive terminals provided by brokers, as well as through investment aggregator sites.

How much is 1 piece

In the vast majority of cases, government bonds are issued with a face value of 1,000 rubles. In the secondary market, their price will be slightly different: slightly higher or lower than the release price.

How to choose

It is necessary to choose bonds based on all factors: liquidity, reliability, profitability, and also taking into account the goals and horizon of your investment. If a market participant needs to deposit money for a short period, then short OFZs are preferable; if an investor needs long-term returns with adequate credit quality, he should look to municipal issues.

Where and how can I buy

You can buy government bonds through a bank or a Russian broker. For those bonds that are traded on the secondary market, the second method is preferable. Government bonds can be bought in the form of structured products, providing wide diversification with a minimum entry threshold.

Independently on the Moscow Exchange

To do this, you must open an account with a licensed brokerage house. Nowadays, this can often be done online. Next, you need to download the trading platform, where to make a deal with suitable government bonds.

As part of the PIF

Mutual funds include many instruments, the entry threshold is minimal. The disadvantage of such products is the lack of online quotation, i.е. all asset prices are calculated only after the end of the auction. 

ETFs

ETF, or market-traded fund, is another type of structured product with a low financial entry threshold and wide diversification across instruments. They are superior to mutual funds in all respects, but the choice of such structural products is not very large.

Top Brokers

Надежные российские брокеры
Название Рейтинг Плюсы Минусы
Финам 8/10 Самый надежный Комиссии
Открытие 7/10 Низкие комиссии Навязывают услуги
БКС 7/10 Самый технологичный Навязывают услуги
Кит-Финанс 6.5/10 Низкие комиссии Устаревшее ПО и ЛК

The biggest players in the industry rightfully lead the way and are popular as they provide a high level of service and top-notch reliability ratings along with competitive fees.

Acquisition calculation by example

I will give an example of the calculation on real paper of the federal loan OFZ 26214. The annual coupon yield of such a bond is set at 6.4%, the face value is 1000 rubles.

However, now it is quoted on the market at 98.91% of the face value: an investor can buy one paper for 989.1 rubles, and this is an additional benefit.

And the effective return on such an investment will no longer be 6.4%, but approximately 7.6% per annum.

Investor reviews

Investors' opinions about government bonds in most cases are positive: with high reliability, these securities give an acceptable income compared to similar instruments. Market participants are also attracted by the possibility of an active position in trading such bonds without losing the accumulated coupon income.

Taxation of government bonds for individuals

All types of government bonds are exempt from 13% personal income tax on coupon payments. However, the increase in the value of the body of the bond when sold on the secondary market will be taxed, except for the part on which the coupon was accrued.

Which is better: OFZ or corporate

What is better, each investor decides for himself. Government bonds are more reliable and liquid, but corporate bonds can bring in significantly more income. It all depends on the risk appetite of each specific market participant.

Conclusion

In the end, I note that in comparison with corporate bonds or dividend stocks, government bonds are not taxed. This moment should always be calculated when predicting profitability. I recommend using these tools both in terms of long-term investments and in the role of opening short-term positions. If an investor does not see possible investments for himself at a particular moment, he should not let his capital idle, it is better to let him accumulate at least a small, but still percentage of profit.

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