What Is Government Security?
In the investing world, government security applies to a range of investment products offered by a governmental body. For most readers, the most common type of government security are those items issued by the U.S. Treasury in the form of Treasury bond, bills, and notes. However, the governments of many nations will issue these debt instruments to fund ongoing, necessary, operations.
Government securities come with a promise of the full repayment of invested principal at maturity of the security. Some government securities may also pay periodic coupon or interest payments. These securities are considered conservative investments with a low-risk since they have the backing of the government that issued them.
U.S. vs. Foreign Securities
As mentioned earlier, the United States is only one of many countries that issues government securities to fund operations. U.S. Treasury bills, bonds, and notes are considered risk-free assets due to their backing by the American government. Italy, France, Germany, Japan, and many other nations also float government bonds.
However, government securities issued by foreign governments can carry the risk of default, which is the failure of paying back the principal amount invested. If a country’s government collapses or there’s instability, a default can occur. When purchasing foreign government securities, it’s important to weigh the risks, which can include economic, country, and political risks.
Real World Examples of Government Securities
Savings bonds offer a fixed interest earning over the term of the product. Should an investor hold a savings bond until its maturity they receive the face value of the bond plus any accrued interest based on the fixed interest rate. Once purchased, a savings bond cannot be redeemed for the first 12 months it is held. Also, redeeming a bond within the first five years means the owner will forfeit the months of accrued interest.
Treasury bills (T-Bills) have typical maturities of 4, 8, 13, 26, and 52 weeks. These short-term government securities pay a higher interest rate return as the maturity terms lengthen. For example, March 29, 2019, the yield on the four-week T-bill was 2.39% while the one-year T-bill yielded 2.32%.
Treasury notes (T-Notes) have two, three, five, or 10-year maturities making them intermediate-term bonds. These notes pay a fixed-rate coupon or interest payment semiannually and will usually have $1,000 face values. Two and three-year notes have $5,000 face values.
Yields on T-Notes change daily. However, as an example, the 10-year yield closed at 2.406% March 31, 2019. Over a 52-week range, the yield varied between 2.341% and 3.263%. In this 52-week range, yields fell once. Weeks earlier, the Fed signaled they would delay hiking interest rates. This information sent yields lower as investors rushed to buy existing Treasuries.
Treasury bonds (T-Bonds) have maturities of between 10 and 30 years. These investments have $1,000 face values and pay semiannual interest returns. The government uses these bonds to fund deficits in the federal budget. Also, as mentioned earlier, the Fed controls the money supply and interest rates through the buying and selling of this product. The 30-year Treasury bond yield closed at 2.817% March 31, 2019.