Investing in government bonds: Basic knowledge and trading methods every investor should know

In a situation where interest rates on deposits are at low levels, many people are turning to other investment channels that offer confidence and stable income. Government bonds have become an attractive option for those who want to save money for the long term with safety. This article will explain the details about government bonds, from their meaning and how they work, to how to buy and sell them.

What are Government Bonds?

Government bonds (Government Bond) are securities issued by the government or state organizations as a tool for raising funds. Investors who purchase bonds are lending money to the government and will receive returns in the form of interest or dividends as specified in the contract.

The government uses the money from bond sales to develop infrastructure, pay public debt, or fund various national development projects. The key feature of government bonds is that they are directly guaranteed by the government, making them less risky than other securities.

How Government Bonds Work

Investing in government bonds is not complicated. You buy bonds at banks or authorized financial institutions. When the specified time (could be 1 year, 3 years, 5 years, 7 years, or longer) has passed, you will receive your principal back along with interest or returns as outlined in the bond document.

Generally, government bonds are sold in units of 1,000 baht. The minimum purchase price is 1,000 baht (1 unit), and you can buy multiple units, as long as the total is in multiples of 1,000 baht, such as 2,000 baht, 10,000 baht, or 150,000 baht. There is no maximum limit or restriction on the number of purchases.

Types of Government Bonds

The government bond market includes various types, especially in large financial markets like the United States, categorized by maturity periods as follows:

• Treasury bills are short-term bonds with maturities within one year.
• Treasury notes are bonds with maturities between 2 and 10 years, offering fixed interest rates.
• Treasury bonds are long-term bonds with maturities between 10 and 30 years.
• TIPS (Treasury Inflation-Protected Securities) are bonds that adjust their principal according to inflation rates, protecting investors from inflation.

Advantages of Investing in Government Bonds

Maximum safety is the main advantage that attracts investors to government bonds. Since they are directly guaranteed by the government, they are highly credible and carry lower risk compared to other securities.

Additionally, government bonds provide steady income. Investors are certain of the interest or dividends they will receive and when, making them suitable for those seeking fixed income sources.

The variety of investment durations is also beneficial. Investors can choose a period that matches their needs and financial plans, whether short-term or long-term.

Limitations of Government Bonds

Although government bonds are very safe, their returns are relatively low compared to higher-risk securities. Therefore, investors seeking high and quick income might not prefer government bonds.

Accumulated returns are limited; you cannot expect your investment to multiply many times. Instead, they serve as a safe way to save money and receive continuous returns.

Furthermore, economic changes can impact bond prices. During economic downturns, monetary policy shifts, or interest rate adjustments, the prices and yields of government bonds may be affected.

Factors Affecting Government Bond Prices

Interest rates are the primary factor influencing bond prices. When central bank interest rates increase, government bond prices tend to fall because investors can get higher returns from newly issued bonds.

Economic conditions also play a significant role. In stable and strong economies, investors often shift to higher-yield assets. Conversely, during uncertain times, government bonds become a safe haven, causing their prices to rise.

Central bank policies influence interest rates and overall market conditions. Rate hikes or cuts directly impact bond prices.

Additionally, global economic situations affect international capital flows, which in turn influence government bond yields in different countries.

Why Do Investors Decide to Buy Government Bonds?

Government bonds are a key risk diversification tool for investors seeking a balance between safety and returns. Long-term investors often combine government bonds with other securities to reduce overall portfolio risk.

Another reason is confidence in the issuer. Since the government guarantees repayment, investors have lower concerns about default.

Those seeking fixed income and long-term financial planning find that government bonds provide confidence and support in achieving financial goals.

How to Buy Government Bonds

For those interested in investing in government bonds, here are the methods:

Primary Market (Primary Market) involves purchasing bonds at issuance, before they are traded among investors. Investors can follow announcements from the Government Savings Bank or commercial banks authorized as bond distributors. When new bonds are issued, subscription periods are announced.

Secondary Market (Secondary Market) is where already issued bonds are bought and sold. Investors can purchase from other investors or through intermediaries. There are two ways: direct trading (OTC - Over The Counter) or through brokers acting as intermediaries.

Bond mutual funds are another option for those who prefer professional management. Simply open an account with a bank or investment firm offering bond funds to invest.

Monitoring the Yield of Government Bonds

Bond yields are closely watched indicators, especially the 10-year bond yield, which reflects market confidence.

When bond yields rise, it often indicates economic strength and can affect currency values. Conversely, falling yields may suggest market caution or slow economic growth.

Summary

Government bonds are an investment option suitable for those seeking safety and steady income. Although returns are lower than other investments, the confidence and clear returns they offer are valuable for long-term financial planning.

Investors with different objectives should consider factors such as investment duration, economic conditions, and personal needs to decide whether government bonds are a suitable addition to their portfolio.