Government bonds securities issued by sovereign, state or local authorities to fund public spending; investors lend to a government in exchange for periodic coupon payments and return of principal at maturity, typically enjoying the highest credit safety in their domestic currency.
1. Core Features
| Attribute | What It Means | Typical Range |
|---|---|---|
| Issuer | National Treasury, agency or municipality | U.S. Treasury, JGBs, Bunds, Gilts |
| Coupon Type | Fixed‑rate, inflation‑linked (TIPS), or floating | 0 %–8 % |
| Term to Maturity | Bills (< 1 yr), notes (2–10 yr), bonds (10–30 yr), ultra‑long (50–100 yr) | 1 month–100 years |
| Currency | Local (on‑shore) or hard‑currency (USD, EUR) for EM | 150+ sovereign curves |
Because governments can tax or print money, default risk is minimal for developed‑market bonds, though exchange‑rate risk persists for foreign investors.
2. Why Portfolios Hold Them
- Safety & Liquidity. U.S. Treasuries trade trillions daily, forming the world’s benchmark risk‑free rate.
- Income & Risk‑Off Hedge. During recessions, yields often fall, boosting bond prices and cushioning equity drawdowns.
- Policy Signalling. Central banks buy and sell government bonds to steer monetary conditions (QE, QT).
3. 2025 Market Pulse
- U.S. 10‑year yield: about 4.28 %, down from the 5 % peak in October 2024.
- German 10‑year Bund: 2.05 % as ECB holds rates at 3.75 %.
- Japan 10‑year JGB: 1.12 % after BOJ fully exits Yield‑Curve Control.
- Emerging‑Market Local Debt Index: up 7.9 % YTD, driven by Brazilian and Mexican rate cuts.
With global inflation cooling to 3.6 %, bond volatility has normalised from 2022’s extremes.
4. Key Risks
- Interest‑Rate Risk. When yields rise 1 %, a 10‑year bond loses roughly 9 % in price.
- Inflation Surprise. Real returns erode if CPI outpaces coupon income; thus, TIPS or linkers hedge.
- Sovereign Stress. Emerging markets occasionally restructure (e.g., Sri Lanka 2022), hitting hard‑currency bonds.
- Currency Risk. A rising dollar can wipe out local‑bond gains for foreign investors.
5. Benchmarks & Trading Vehicles
| Region | Flagship Index | ETF Example |
|---|---|---|
| US | Bloomberg US Treasury Index | GOVT |
| Global DM | FTSE WGBI | BWX |
| EM Local | JP Morgan GBI‑EM Global Diversified | EMLC |
| EM Hard‑Currency | JP Morgan EMBI Global | EMB |
Futures (10‑year T‑note, Bund) and interest‑rate swaps also let traders hedge rate risk precisely.
6. Yield‑Curve Dynamics
The spread between 2‑year and 10‑year Treasuries remains inverted at ‑38 bp—often a recession harbinger—though steepening is expected once rate cuts begin. Curve shape reflects policy expectations, term premium and supply/demand forces (e.g., Treasury refunding).
7. Looking Ahead
Markets price two 25 bp Fed cuts in H2 2025; if growth softens, duration could outperform. Net Treasury issuance, however, stays high (> US $1.8 T 2025), potentially pressuring long yields unless foreign demand soaks it up. Inflation‑linked issuance is slated to rise 15 %, expanding TIPS float.
Key Takeaways
- Government bonds anchor global finance as the baseline risk‑free instrument.
- They provide liquidity, diversification and policy insight but face rate, inflation and currency risks.
- 2025 sees moderating yields, inverted curves and heavy sovereign supply—dynamics worth tracking for allocation decisions.