Investing in Government Bonds: A Practical Guide

Governments in need of money issue government bonds, which provides investors with an interesting investment opportunity. This guide provides clear information about how to invest government bonds, and explains the potential risks

What is a government bond?

Government bonds are debt obligations for which a government is the issuer and borrower. When you buy government bonds, you become the lender, and the government that issued the bonds pays you interest on the loan. The interest payments are called coupons. Government bonds normally have a fixed bond term, at the end of which the borrower normally repays the loan (the bond’s face value).

Government bonds are securities, and many are traded on stock exchanges. You can buy and sell exchange-traded bonds at any time during the bond term, but the market value of government bonds fluctuates constantly based on a number of factors. These include the current interest environment, expectations of future interest and inflation rates, and the creditworthiness of the issuing government.

You can find general information about bonds in the moneyland.ch guide to investing in bonds.

What should I pay attention to when investing in government bonds?

The annual interest rate – or coupon – is a key factor for choosing a government bond. With most bonds, the interest rate remains the same for the entire bond term. In addition to interest, there are a number of other important points to focus on:

• Creditworthiness: Before you buy a government bond, it is important to check the borrower’s creditworthiness ratings. These indicate the likelihood that the borrower will actually make the interest payments and repay the loan at the end of the bond term. Creditworthiness ratings play a key role in determining your investment returns. The rule of thumb is that the higher a borrower’s creditworthiness is, the lower the risk of loss is, and the lower the interest rate is. Government’s creditworthiness is regularly assessed by rating agencies (see Table 1). Be wary of high-interest bonds – often referred to as junk bonds – as the risk that the borrower will not be able to repay the loan is usually high.
• Maturity date: The maturity date is the date on which the bond term ends and the borrower repays the loan. Tendentially, the longer the remaining bond term is, the higher the risk of a default is. The bond term and the interest environment usually have a strong influence on the price you have to pay for an already-issued bond on the stock exchange.
• Price: The market price of bond fluctuates on an ongoing basis. The price you have to pay for a government bond on the stock exchange can be very different from its face value and from its original price at the time it was issued.
• Discounts/markups: In rare cases, a government may issue bonds with a markup or discount on their face value. The terms agio and disagio are sometimes used to denote markups and discounts respectively. Markups or discounts are shown as a percentage of the face value (the face value equals 100 percent). Because a bond’s coupon is based on its face value, a discounted issue price results in a higher actual return.
• Currency: Be sure you know which currency a bond is denominated in before you invest. When you buy bonds denominated by foreign currencies, you expose yourself to a currency exchange risk. Changes in the exchange rate for converting a foreign currency into Swiss francs affect the real returns for investors in Switzerland.

Important: The coupon – the interest you receive when you hold a government bond – generally is not identical to the return on your investment. The same bond with the same coupon could yield a higher or lower return depending on the price you pay for it. For example, if you buy a government bond with a remaining bond term of 10 years and an interest rate of 5 percent per year at market price that is 30 percent lower than its original price when it was issued, your actual return will be nearly 10 percent per year.

Table 1: Creditworthiness ratings of the 10 leading economies

Daten gemäss Ratingagenturen. Stand: 15.01.2025. 

How can I invest in government bonds?

You can buy government bonds using a stockbroker. Each bond issue has a unique ISIN identifier that you can use to find the exact bond you want to invest in.

Pay attention to the fees charged by stockbrokers. Brokerage fees and custody fees vary between service providers. The stamp duties that are levied every time you buy or sell bonds are always the same, regardless of which Swiss stockbroker you use.

Before you can begin to invest, it is advisable to compare different stockbrokers. High fees will negatively impact your investment returns. The moneyland.ch online trading comparison helps you find the most suitable stockbroker.

The table below shows the most recent bond issues from a selection of governments.

Table 2: Latest government bond issues from the world’s 10 leading economies

Date: January 15, 2025. Sources: Corresponding government offices.
Note: Some of the government bonds shown above may not be offered by all stockbrokers.

Are there any global bond indexes?

There are numerous indexes that track global bond markets. The most important bond indexes are listed below:

• FTSE World Government Bond Index: Unofficially, this index is considered to be the definitive global government bond index. It is made up of government bonds that have a fixed interest rate, a minimum remaining bond term of one year, and a market capitalization of at least 50 billion US dollars. The index is currently includes government bonds from 22 different developed and developing countries (as per January 2025).
• FTSE World Government Bond - Developed Markets: This index is based on the FTSE World Government Bond Index, but only includes government bonds from developed countries.
• FTSE G7 Government Bond Index: This index is also based on the FTSE World Government Bond Index, but only includes government bonds from G7 countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

Can I use ETFs to invest in government bonds?

Yes. There are many exchange-traded funds (ETFs) and index funds that replicate various bond indexes, such as the global bond indexes listed above (see Table 3). These passively-managed funds are a relatively affordable way to invest in a whole basket of different government bonds, rather than buying each bond individually. That enables you to diversify your bond portfolio right from the start, even if you can only invest small amounts of money at a time. Index funds differ from ETFs in that they are not traded on stock exchanges, but are otherwise very similar to index ETFs.

Table 3: Selection of ETFs and index funds that replicate global government bond indexes

* The funds can make use of both physical and synthetic replication methods.
Date: January 15, 2025. Sources: Fund managers and Justetf.com.

If you are also interested in investing in bonds from specific governments, there are numerous ETFs that invest in government bonds from a specific country. Examples include ETFs that invest in French, German, and US government bonds.

You can learn about what to consider when investing with ETFs in the checklist for choosing an ETF.

Which risks should I pay attention to?

There are a number of risks to watch out for when investing in government bonds:

• Counterparty risk and risk of default: Government bonds are loans to a government. You bear the risk of the lender being unable to repay the loan, which is theoretically possible. Always check a government’s creditworthiness ratings before investing in its bonds. If you use ETF to invest in bonds, the risk of loss is lower because the fund invests in a diversified portfolio of different bonds from different issuers.
• Interest risk: Most government bonds have a fixed interest rate. The market prices of government bonds react very sensitively to the overall interest environment and expectations surrounding future interest rates. That is especially true of government bonds with long bond terms. If interest rates go up, the value of a bond will go down, and vice versa.
• Currency risk: Bonds issued by foreign governments are normally denominated in foreign currencies. Changes in the exchange rate between the denominating currency and the Swiss franc can impact your real returns. For example, if the US dollar were to lose value against the Swiss franc, the value of dollar-denominated bonds for Swiss investors will also go down.
• Political risks: When investing in various government bonds, you should not only look at the creditworthiness of the issuing countries, but also the political risks. For example, government bonds can become the target of sanctions, as was the case when Swiss stockbrokers halted trading in Russian government bonds in 2022.

Is investing in government bonds profitable?

Firstly, it is important to understand that you cannot predict investment returns from bonds unless you hold them until the end of the bond term (the maturity date). The market prices of bonds fluctuate constantly. The future performance of bond ETFs is also impossible to predict.

From a historical perspective, well-diversified stock portfolios – ETFs that replicate global stock indexes, for example – have normally delivered higher returns than government bonds. In Table 4, you can see a historical performance comparison of a government bond ETF and a stock ETF that replicates the MSCI World index. When compared directly, the well-known global stock index has a clear lead.

The main reason why the government bond ETF has had negative performance over the past five and 10 years is that interest rates in capital markets climbed at the end of 2021. The result was that the market prices of many long-term bonds held by the ETF fell drastically, dragging the fund’s performance into the red.

Table 4: Performance comparison between a government bond ETF and a global stock ETF

Source: Justetf.com. Performance in CHF, accounting for dividends. Sampling dates: January 14, 2015; January 14, 2020; January 14, 2025.

Disclaimer: This article is provided for informational purposes only and should not be considered investment advice. The publishers do not accept any liability in connection with this article.

More on this topic:
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How to minimize the costs of investing in bonds
How to invest in Swiss government bonds
How to invest in bond ETFs
Checklist for choosing the right ETF