Which Bonds Are Riskier as Investments?
8 of 11 in Series: The Essentials of Investing in Stocks and Bonds
Every year, millions of bonds are issued by thousands of different governments, government agencies, corporations, and municipalities. The following list looks at the degree of risk for each major kind of bond.
U.S. Treasury: Politicians like raising money by selling bonds, as opposed to raising taxes, because voters hate taxes. There are many different kinds of debt securities issues by the U.S. Treasury, including savings bonds and Treasuries. Every bond is backed by the full faith and credit of the U.S. government and, therefore, is considered by most investors to be the safest bet around.
Agencies: Federal agencies and government-sponsored enterprises (GSEs) issue a good chunk of the bonds on the market. Federal agencies issue bonds that carry the full faith and credit of the U.S. government. GSEs aren’t quite government and aren’t quite private concerns; their bonds carry an implicit guarantee that the U.S. government will bail them out in times of trouble. As a result, they do carry a higher risk than Federal agency bonds.
Corporate bonds: Bonds issued by for-profit companies are riskier than government bonds but tend to compensate for that added risk by paying higher rates of interest. In recent history, corporate bonds in the aggregate have tended to pay about a percentage point higher than Treasuries of similar maturity.
Municipalities: Municipal bonds (munis) issued by cities, states, and counties are used to raise money either for general day-to-day needs of the citizenry (schools, roads, sewer systems) or for specific projects (a new bridge, a sports stadium). Munis are generally very safe animals — at least those rated by the major rating agencies (such as Moody’s), which are the vast majority of munis. Also, roughly two-thirds of municipal bonds issued today come insured; you can’t lose your principal unless the insurer and its insurance company go under, which is very unlikely.