Why You Should Add Government Bonds to Your Portfolio

You can get your savings bonds replaced by writing to the The Bureau of Public Debt. Jason Raff/Shutterstock

One way to protect your investments from the fluctuations in the market is to invest in government bonds.

These financial instruments—also referred to as treasury direct bonds or Treasury securities—can help stabilize your investment money and balance your portfolio because they are backed by the credit of the U.S. government. There are several types of government bonds to choose from, which enable you to pick the one that is right for your needs.

Types of Government Bonds

Before buying any government bonds, you need to look at what you want to do with your portfolio. The many types of government bonds give you considerable flexibility in maturity dates. All of them offer lower interest rates than corporate bonds, but the returns, while smaller, are virtually guaranteed.

There are seven primary types of investments offered by the government with a fixed-income rate of return. They virtually have zero default risk, which means that you are almost guaranteed to not lose money when investing in them. They include:

1. Treasury Bonds—called T-bonds—will mature in 20 or 30 years. Interest payments are paid every six months at an interest rate that is fixed at the time of purchase. The interest rate is higher on T-bonds than it is for treasury notes or treasury bills, which may make them the best government bonds to buy. At maturity, the face value of the bond is paid to the owner.
2. Treasury Notes—T-notes—can be purchased that will mature anywhere from two to ten years (two, three, five, seven, and ten years). Interest rates are lower than T-bonds, and they also pay bi-annually. When matured, T-notes pay the face value.
3. Treasury Bills–Government T-bills—have the shortest maturity rates—ranging from as short as four weeks to one year (four, eight, 13, 26, and 52 weeks). No interest is paid because of the short terms, but they are sold at discount (less than face value).
4. Treasury Inflation-Protected Securities (TIPS). These government-issued bonds have maturities of five, ten, and 30 years. Investopedia says that these bonds offer six-month dividend payments based on current inflation rates. When they mature, owners receive the greater of the original principal or the adjusted principal.
5. Floating-rate notes (FRNs). These bonds mature in two years. Interest is paid quarterly, which is based on the 13-week Treasury bills. These bonds carry a risk of offering falling rates, says BusinessInsider, but owners receive the principal at maturity.
6. Series I Savings Bonds. Bonds are purchased at face value and earn interest monthly for up to 30 years. Interest rates will protect the bonds from inflation. You may sell them at any time.
7. Series EE Savings Bonds. These bonds are also sold at face value and earn interest based on market rates for up to 30 years. You can sell these bonds at any time.

An exterior view of the building of US Department of the Treasury is seen in Washington, on March 27, 2020. Olivier Douliery/AFP via Getty Images

How to Purchase Government Bonds

When you are ready to buy government bonds, you can purchase them directly from the government. The government sells its bonds at auctions which are held throughout the year but only at certain times for the different types of bonds. The minimum amount needed is $25 for savings bonds, but bids start at $100 and rise in $100 increments.

You can buy government bonds at auctions that are conducted on the government’s website—TreasuryDirect. T-notes are sold monthly, T-bills are sold weekly, and T-bonds are sold at auctions only four times per year—the first Wednesday in February, May, August, and November.

BusinessInsider reveals that buying at auction on the government’s website can be done in two ways. You can bid non-competitively or competitively. Bidding non-competitively guarantees your bid is going to be accepted, but you will have to accept the interest rate given. If you choose to go with competitive bidding, you specify the interest rate you want—but it will only be accepted if it is equal to or lower than the pre-determined rate the auction sets.

Bonds can also be purchased through banks or brokers—called the secondary market. When buying from these sources, you will likely pay a fee for them to make the transaction for you—which means it will cost you more than if you bought directly from the government.

Various brokerages also give you access to purchase bonds. Investopedia says that you can also purchase them as a money market account or as ETFs and they are often sold commission-free.

The Treasury Department building in Washington on July 22, 2019. Alastair Pike/AFP via Getty Images

How to Sell Your Bonds

Selling bonds requires that you transfer them to your bank or broker first—if it is held by TreasuryDirect (use a Transfer Request Form). Then, they will sell it for you.

Although a bond can be sold at any time after 45 days, Zacks says that there may be some charges to do so. When kept by TreasuryDirect, the money in the bond can be reinvested into new bonds if you choose to do so.

When Losses May Occur

Government bonds come with a guaranteed return. However, the guarantee is not valid if it is sold in advance of the maturity date. In that case, you may experience a gain or a loss—depending on how you sell it.

Whether you see a gain or a loss depends on how much you sell it for. At a minimum, you must hold on to the bonds for at least 45 days before you are allowed to sell them. The difference between how much you paid for it and how much you sell it for determines your gain or loss.

You are required to pay a capital gains tax if there was a profit earned on the sale of your government bonds. You will not pay any state or local taxes when you sell a government bond.

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