Government or Corporate Bonds: Which Is Riskier?

Introduction:

The debate over the riskiness of government bonds versus corporate bonds has been ongoing for decades. Both types of bonds have their own advantages and disadvantages, and the best choice for an investor depends on their individual circumstances.

Government Bonds:

Government bonds are issued by the U.S. government, and they are considered to be the safest type of investment. This is because the government has the full faith and credit of the United States behind it, and it is unlikely to default on its obligations. As a result, government bonds typically have lower interest rates than corporate bonds.

Corporate Bonds:

Corporate bonds are issued by corporations, and they are considered to be riskier than government bonds. This is because corporations are not backed by the full faith and credit of the government, and they can default on their obligations. As a result, corporate bonds typically have higher interest rates than government bonds.

Which Is Riskier?

The relative riskiness of government bonds and corporate bonds can be measured by their default rates. The default rate is the percentage of bonds that have defaulted over a given period of time. According to Moody's Investors Service, the default rate for government bonds was 0.00% in 2021. The default rate for corporate bonds was 0.40% in 2021.

These figures show that government bonds are much less risky than corporate bonds. However, it is important to note that the default rate for corporate bonds can vary significantly depending on the type of corporation and the industry in which it operates. For example, the default rate for investment-grade corporate bonds was only 0.06% in 2021, while the default rate for high-yield corporate bonds was 2.51%.

Factors to Consider When Choosing:

When choosing between government bonds and corporate bonds, investors should consider the following factors:

• Their risk tolerance: Investors who are risk-averse should consider investing in government bonds. Investors who are more tolerant of risk can consider investing in corporate bonds.
• Their investment horizon: Investors who are planning to invest for a long period of time can consider investing in corporate bonds. Investors who are planning to invest for a short period of time should consider investing in government bonds.
• Their financial goals: Investors who are saving for retirement should consider investing in government bonds. Investors who are saving for a down payment on a house should consider investing in corporate bonds.

Conclusion:

Government bonds are generally considered to be less risky than corporate bonds. However, the relative riskiness of the two types of bonds can vary depending on the type of corporation and the industry in which it operates. When choosing between government bonds and corporate bonds, investors should consider their risk tolerance, investment horizon, and financial goals.