Government Bond

Governments issue bonds to fund spending that is not covered by taxes, such as infrastructure, public services or budget deficits. Investors lend money to the government by buying these bonds.

Bonds issued by financially stable governments in their own currency are generally considered among the safest investments, because such governments are very unlikely to fail to pay. For that reason, the yields on these bonds are often used as the risk-free rate in financial calculations. Examples include US Treasury securities, UK gilts and German government bonds.

Not all government bonds are equally safe. Governments with large debts, weak economies or political instability, or those that borrow in a foreign currency, may have to pay much higher interest rates to attract investors, and some have defaulted in the past.

Government bond yields are an important signal in financial markets. They influence mortgage rates, corporate borrowing costs and the valuation of shares. The difference between yields on short-term and long-term government bonds forms the yield curve, which is closely watched as an indicator of economic expectations.

Note: A sovereign bond means the same as a government bond issued by a national government. The term "sovereign" is often used when discussing a country's creditworthiness or bonds issued in foreign currencies.